Is there really that big of a demand for slim models? If so, why?

This. Or some new hardware maybe.

Another Price cut to $200.00 for the 299 model. More SKUs. Bundle Halo 3 or Gears with the Arcade at $150.00

microsoft cant cut the price as much as sony can in 09 unless they want to lose all their money. so MS will have to wait till the end of 09 or '10.

Actually MS's initial goal was to destroy sony when they entered the console business..

Huh?  What?

OK. I will take it. I Googled and could not find any quote from Microsoft stating that they would "crush Sony". I did find the title "Gates says Xbox 2 will crush Sony" on TechSpot but when following its link to the source I found in the BBC article that Gates actually said "Gates says Xbox 2 will beat Sony". So a TechSpot editor decided to make a provocative title by inventing a new quote for Gates - and the intertubes just takes it as it is a fact. Check the sources guys, before you post something like this and perpetuating lies.

Microsoft is not in it to "crush Sony". Microsoft is in a business it thinks it can make money in. And like in any business that Microsoft competes in, the big money comes when you become the #1 vendor. And kids: becoming the #1 means that you have to beat anybody else with the same aspirations. I am sorry that you see it as offensive or underhanded. Beating the competition is the hallmark of any business. in fact not trying hard to beat the competition may be viewed as illigal collusion under the law.

So Microsoft, just like Sony and Nintendo, is out there to make money, and this means competing hard, taking share from the other players.

I'm surprised that no one pointed out the OP is FULL of assumptions.

Sony stated clearly that their competitive approach is to sell on value rather than price. That had been their strategy from day one and the keep repeating it frequently. I expect Sony to find ways to increase the value of the PS3 instrad of cutting its price.

But lets assume Sony will at some point cut the price. Indeed what would Microsoft do?

If Sony cuts the price by $50 to $350, Microsoft is still sitting pretty nicely with the Arcade. The target audiance for the Arcade is not the one that would consider the $350 PS3.

One the Elite and Pro models there will be a price pressure. Microsoft will have to yield on price there. My guess - Increase the Elite HD capacity to 250GB and sell it for $350. The Pro will get the $120GB drive and will sell for $280. Adding more disk capacilty is a very cheap way for Microsoft to differentiate itself from Sony without increasing its marginal cost considerably.

A new slim design will wrap the year for Microsoft and will allow it to increase its 2008 holidays momentum through 2009.

I agree that the base premise of the OP is wrong. Sony is not going to have a price cut in the foreseeable future.

That said, Sony will become more competitive in 2009 through additional features and bundles while keeping the price high. And as they become more competitive Microsoft may need to react in some ways.