No. You can upgrade, downgrade, or exchange phones whenever you want.
Most of the time you get discounts on new phones when renewing your contract, which can only be done once every 18-24 months in a 2-year contract. The contract is for the service. You must pay them $X per month for two years or pay a disconnect fee. (Sometimes if you move to an area with poor/no coverage they will waive the fee.)
You can use whatever phone you want, as long as it's compatible with the carrier. It's just that they won't give you a discount to replace it. Discounts can run around $650 off for an iPhone 4 with AT&T, so it is often wise to wait to upgrade.
no, but you hAve to pay the full price if you want a new phone. 2 year contract just means you're with that company for 2 years. and if you want to cancel your contract before the 2 years are up you have to pay:(