Woa, chill your bean!
You are doing an unfair comparison on the total cost of the contract vs the lease. To make it a fair test, you can only change ONE thing.
You have not included the insurance in your second calculation, so, work it out correctly, to make your claims fair! You have also failed to use the CORRECT pricing structure for 12 month contracts....
A more fair calculation....
600m Unlimited SMS + 500mb bolt on = £42 per month (Inc Vat) plus £12.50 for Insurance (Inc IPT)
Total monthly cost -
upfront cost = £239 (inc vat)
Total cost: = 654 + 239 = £893.
The O2 Lease is an awesome idea for people who like a new phone every year. And the chance of getting a £260 to recycle your phone at the end of the 12 month contract is quite slim considering the fast-paced mobile market.