AT&T is preparing cut the price of the 3G iPhone by as much as $200, bringing the price of the 8GB memory 3G model down to $199 for customers who agree to sign a two-year contract. The $200 rebate or subsidy would be limited to AT&T customers and not available through Apple's stores.

Average iPhone users have around double the typical U.S. monthly spend, making it easier for AT&T to finance higher subsidies. If the handset is sold with a subsidy, then the activation process will need to be carried out in the retail store. A cash-back model would allow Apple to continue its current policy of selling the phone without managing the activation process itself.

It was recently reported that Foxconn has secured orders for a 3G iPhone, with anticipated shipments of 3-4 million units in the first month after its launch.

The new iPhone is expected to be released on the one-year anniversary of the original iPhone debut around June 27. A few weeks prior to that launch, Apple is planning to stop supplies of the older model iPhone. This will help clear out inventory and stir up demand for the new device. It will also attempt to avoid the public relations pratfall Apple made when it cut the price of the iPhone without warning last year.