Update: The following statement from Facebook was left in the comments:

“The story, which originated in Techcrunch, is not accurate. Facebook is not building a phone. Our approach has always been to make phones and apps more social. Current projects include include everything from an HTML5 version of the site to apps on major platforms to full Connect support with SDKs to deeper integrations with some manufacturers. Our view is that almost all experiences would be better if they were social, so integrating deeply into existing platforms and operating systems is a good way to enable this. For an example, check out Connect for iPhone and the integration we have with contact syncing through our iPhone app. Another example is the INQ1 phone with Facebook integration (the first so-called “Facebook Phone”). The people mentioned in the story are working on these projects. The bottom line is that whenever we work on a deep integration, people want to call it a "Facebook Phone" because that’s such an attractive soundbite, but building phones is just not what we do.”

TechCrunch points out that Google also said it wasn’t working on a phone, and says Facebook is lying.

Original Article: According to Michael Arrington at TechCrunch, Facebook is working on its own mobile phone, which could conceivably compete with Apple’s iPhone and Google’s Android. According to his sources, two high-level Facebook employees with "deep operating system experience" are working on the project. 

It’s unclear who the source of this information is, other than "a person who has knowledge of the project", but it would not really be a surprise if it is true. 

As we discussed in a recent article, one of the reasons Google has an advantage over Facebook in the big picture (with its Google Me initiative) is that it has an operating system. Make that two operating systems (Android and Chrome OS), not to mention a browser. A Facebook mobile operating system could only be another weapon in the social network’s arsenal. 

"Specifically, Facebook wants to integrate deeply into the contacts list and other core functions of the phone," writes Arrington. "It can only do that if it controls the operating system."

In the end, it really is all about contacts isn’t it? Social media only works if you have people to socialize with.