64GB iPod Touch: £299
Unused phone with 3G: £0
SIM only contract with data: £20
Total 18 month cost: £660
32GB iPhone 3G S: £274.23
18 month contract with data: £35
Total 18 month cost: £905
Now the new iPod Touch doesn't have a camera (yet) and you have to carry two devices around but for an extra £245 in my wallet I could live with that. Plus if your "old" phone can share a 3G connection over Wi-Fi you're sorted.