If the rumors are to be believed, the next generation iPod Touch will close even more of the gap with its bigger cousin, the iPhone.

According to Wired, Apple is in full production on the third generation iPod Touch, and it will be receiving some major changes.  How does it get there?  Well, basically they give you everything but the actual phone… oh wait… that isn’t totally gone.

According to the source, the new iPod Touch will have a camera, a first for the iPod line, but not wholly unexpected.  When the iPhone 3G S added the ability to shoot video, people pretty much assumed the iPod version would finally be getting a camera.  However, if you’re going to shoot video, you need a way to record audio, so that’s where the addition of a microphone comes into play.

So it looks like the Touch will be doing a lot of new things, but… wait, if it has a microphone…

Well, it isn’t confirmed yet, but it looks like you could use the Skype app to make VoIP calls oer Wi-Fi, so the iPod Touch will indeed have phone functions it looks like.  The only difference will be the lack of access to a cellular network, but anywhere you are in the range of Wi-Fi, you’ll have a phone.  Imagine dumping your landline at home and walking around your house with a Skype-enabled iPod Touch in your pocket.  This could be a real game changer not just for Apple, but for cell phone companies in general.

An announcement will probably come in September at the suspected iPod media event.