Sounds straight forward enough: sign up a new 16gb iPhone, AT&T back-dates the new contract to the date of your original iPhone contract, so no extension or doubling, and your old SIM card gets out of contract.
Siegel confirms that upgrading to a new iPhone does indeed require signing what is technically a new two-year contract. However, the new contract is backdated to the signing day of the original contract, i.e., you won't be doubling your AT&T servitude to four years. Seigel also confirms that users should activate new iPhones with the new SIM provided with the phone.
Sounds straight forward, but who wants to guess the amount of time people will spend on the phone with AT&T tech fixing up blunders?