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Old iphone WILL in fact be getting the software update to 2.0 (with tons of improvements as wll as access to the new AppStore), so minus the 3g and true GPS, it will function the same.
But to have paid $599 and now the new one is $199, that a little hard to swallow.. You will have to get or extend your AT&T contract to 2 years to get the $199 or $299 for the 16gb price though.
P.S. My Wifi and phone have been working great since day one... no complaints, love it.
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