MobileCrunch: The creator of iCombat wrote an analysis of his experience making and giving away a free "lite" version of his app alongside his paid, full version. The result? It makes economic sense to create a lite version early on and update it often to goose the users into downloading - and paying attention to - your app.
His global conversion rate was 9% which meant that a considerable cohort of lite users bought the full version. He discovered a number of best practices for iPhone devs and allowed us to post them here. His most important takeaway? He should have made a lite app much earlier in the game. The conversion rate once the lite app was made available was quite impressive and meant a lot of lost revenue.