Any information I require on apple products I go to the website and ring apple directly, if they don't know nobody does. With respects to Cypriot sales people, you kind of said it all.
From my experience of the phone I can tell you it has had a few problems particularly with updating. Some of it's customers have had their entire contact list erased once they updated the firmware. It also works on the older 2G networks, which means it will not be on a fast network. However apple have recently announced that it will be doing something about it in 2008.
There was a phone similar to the iPhone some time back, known as the Prada phone. It was terrible, on the whole the iPhone is a nice phone and if you can afford it it is worth having.
You can use the phone for internet access, but I don't think it works how you specified. If I am wrong please correct me. I think the internet mobility is either through wifi or GPRS. Unlike New York I don't think Cyprus has complete WiFi just yet. You will probably be able to use the phone for internet services in cafe and in other people houses who have a wireless network set-up.
http://www.trustive.com/hotspots/Cyprus/
Consider this, if GPS is fairly bad in Cyprus what are the chances that there is going to be WIFI spots throughout the island, hope that helps you understand.
But I do think you can use your normal SIM card to surf online and pay per minute. If this is a possibility it is likely to be slow and expensive.
To be honest I feel the iPhone is at least 4/5 years ahead of Cyprus infrastructure. One of the most impressive features of the phone are the google maps. Cyprus does not really support google maps.