Apple marketing boss Phil Schiller kicked off the keynote at the show
Apple has cut the price of its iPhone 3G with 8GB of memory to $99 (£61).
It made the announcement at its annual developers conference where it also unveiled a new iPhone 3GS.
The "S" is for speed, said Apple, because under the bonnet hardware improvements speed up common tasks such as rendering graphics.
The 3GS also has better battery life. Apple said it should run for 5 hours of talk time and nine hours of wi-fi net browsing between charges.
The BBC's Maggie Shiels reports from the conference that the wave of speculation that preceded the event seemed to lower expectations, with many saying the keynote address did not surprise them.
"Its not a game changing day today," said Steven Levy of Wired magazine.
"We have been trained to think that when one more thing comes out from Apple it is going to rock our world, and today that didn't happen."
However, Ge Wang, developer and founder of Smule, which develops applications for the iPhone, said he was impressed, even if it was not a headline grabbing speech.
"We are excited to make use of anything and everything we can get our hands on to make our applications more compelling and perhaps a little bit more magical," he said.
The iPhone 3GS can be controlled by voice and talk back to its owner about the music it is playing.
The changes also update the onboard camera to 3megapixels, up from 2megapixels in earlier versions. The iPhone 3GS can also shoot video at 30 frames per second.
The iPhone 3GS will cost $199 for a 16GB version and $299 for a 32GB version. The phone will be available from 19 June in the US and UK.
On its website O2 has clarified prices for the different iPhones. The iPhone 3G is free on all but the two lowest monthly tariffs where it costs £96.89. Customers must also commit to at least an 18 month contract.
Customers can get a iPhone 3GS for free if they pick the highest monthly tariffs.
Also unveiled at Apple's Worldwide Developers Conference was a "Find my iPhone" feature for the handset that lets users find out where their lost phone has got to. The service is only available to MobileMe subscribers.
Apple said it had now sold more than 40m iPhones and iPod touch devices.
It also refreshed its MacBook laptop line, cutting prices, boosting speeds and improving the machines' battery life.
Despite widespread rumours, Apple boss Steve Jobs did not make an appearance at the conference.
The news comes only hours after handheld veteran Palm released its much-anticipated Pre phone.
While the Pre did not generate big queues, it proved popular with the small crowds that did turn up to buy one.
The Pre is available on the US Sprint network. No word has yet been given on when it will be available in the UK. O2 will be the launch network for the Pre in the UK.