Over the past few weeks, rumors have been swirling that Apple is preparing to launch a revamped iPod touch featuring a built-in camera. Although there’s not much in the way of hard evidence, beside some dubious silicone skin cases for the alleged device, a “well-connected source” speaking to Wired claims the rumors are right on the money.

The latest report adds to the camera notion by saying Apple will include a built-in microphone as well, transforming the popular media player into a nifty VoIP phone wherever a Wi-Fi connection is available. The inclusion of a microphone and camera would also enable the iPod touch to understand voice commands, capture video, and work with a wider variety of apps.

If true, the move could help revitalize iPod sales, but at the cost of creating a potential competitor to its own iPhone. Surely, the company will have something up its sleeve to keep the sales of one from cannibalizing the other. According to Wired’s source, Apple’s factories in China are already manufacturing the new iPod touch, which will go on sale in “two to three months.”