Watching Apple's every move is a spectator sport. And the spectators have been agog this week over reports that tech blog Gizmodo was in possession of a lost prototype presumed to be the next generation iPhone.

Apple lent credence to the reports when Apple Senior Vice President and General Counsel Bruce Sewell sent a letter to Gizmodo Editorial Director Brian Lam formally requesting the return "of a device that belongs to Apple."

Reports circulating online say that Steve Jobs himself called Gizmodo asking for the phone back. Apple would not comment for this story. Gizmodo returned the phone to Apple Monday night.

Gizmodo Editor Jason Chen, who examined the prototype and took it apart, told USA TODAY that "what I saw inside is as final as you can get without putting actual serial numbers on it. But Apple is known for doing a couple of final prototypes...and Jobs can change his mind at the last minute. Even if this isn't the final one it's darn close to what you're going to see."

Tech analyst Tim Bajarin of Creative Strategies concurs: "It's mostly likely that was truly a next generation iPhone. Whether it's the final engineering version is a question. I don't know now if the form and function changes."

If Apple sticks to the timeline established with earlier models, a new iPhone would be shown off in June or July.

The prototype that was in Gizmodo's possession apparently differs from existing iPhones in several key ways, both feature-wise and cosmetically.

It includes a front-facing video chat camera, an improved regular back camera, a camera flash, a better display, a micro-SIM (Subscriber Identity Module) card, and more. It will also no doubt run the previously announced iPhone version 4.0 software, which among other new features will permit you to run multiple apps at once.

The lost phone saga began the night of March 18, according to Gizmodo, when an Apple software engineer identified by Gizmodo as Gray Powell inadvertently abandoned the device on a bar stool in a Silicon Valley beer hall. Another patron ended up with the device and apparently tried to return it to Apple. Gizmodo says no one there took him seriously. But Apple knew the device was missing and by the next day had remotely wiped its data.

The phone eventually ended up at Gizmodo, which paid $5,000 to the person who found it, in Chen's words "to do the due diligence to make sure it was real."

Bajarin believes Apple will change the rules about any unannounced prototypes leaving the building. "We all make mistakes," he says. "This particular one was a doozy."

Apple screwed up handling iPhone Gizmo-gate

It appears the saga of the lost (or stolen) iPhone prototype is drawing to a close. Tech blog Gizmodo, which paid $5000 for an unreleased, next-gen iPhone and then posted a detailed preview of the handset, now reports it has returned the device to Apple. Since Cupertino's legal sharks requested in writing that Gizmodo return the iPhone, there's little doubt the handset is the real deal.

The result? Well, the world won't stop spinning, but Apple may decide to make Gizmodo's life miserable with some sort of nasty legal action.  Perhaps more importantly for Apple, the big reveal may curtail the media hype that will accompany the new iPhone's summer launch.

In fact, the next-gen iPhone has already lost much of its mystery, if not its allure. Thanks to Gizmodo's scoop--ethically questionable or not — we already know what the new iPhone will look like, even though many of its finer attributes remain unknown.

Apple botched it

Apple's most rabid enthusiasts will no doubt vilify Gizmodo for the iPhone leak, but based on what we know about the incident thus far, it appears that Apple had a chance to quash the story--or at least limit the damage-- and blew it.

Gizmodo reports that after an Apple engineer left the iPhone prototype in a bar on March 18, another patron found the device, which ultimately found its way into the hands of a tech-savvy individual who recognized the iPhone's unique attributes. This personal then attempted to return the device to Apple by phoning the company's contact and support numbers, but his efforts were unsuccessful.

To be fair, low-level support personnel at any company aren't exactly privy to details about hush-hush, unannounced products. If you're a support rep, and you receive a call from someone claiming to have a top-secret Apple product in his possession, you'd probably assume he's a crackpot. (In fact, an unnamed Apple rep told Gizmodo that's pretty much what happened.)

The other possibility is that word of the missing iPhone did reach Apple management, which chose to ignore the incident, hoping it would blow over. In this scenario, no one would sell the phone to a tech blog, and nobody would be the wiser. If the press found out, Apple could issue plausible denials for a few weeks until the iPhone's summer launch.

Don't talk or else

Tales of Apple's over-the-top secrecy are legendary. According to recent reports, developers earlier this year had to keep their iPads tied to a stationary object in a room with blacked-out windows. And stories of the company's paranoia, including an in-house "loyalty team" that ferrets out leaks, have surfaced in the past. Who knows, perhaps a more open Apple, one where the company's support reps would be more inclined to report potentially lost or stolen gear to their supervisors, could have stopped the Gizmodo leak.

A more open Apple could've simply taken the phone back and said "thanks." But doing so would have been an admission that the device was, in fact, property of Apple. And Cupertino doesn't discuss its unreleased products--ever.

Now, I know that some of you will accuse me of blaming the victim. But the fact is that Apple had an opportunity to plug the leak. Its paranoia contributed to a corporate culture that prevented it from doing so.

Now its summer party has been ruined. Oh, well, there's always the next iPad. (This USA Today story was lifted from Yahoo News – Ed)