It's not the first time we have heard this rumor, but the latest report comes from Reuters, which cites two sources familiar with the matter. According to the report, the iPhone 5 will get a smaller 19-pin connector port instead of the 30-pin version that's used in practically all of Apple's portable products, from the iPad to the iPod.
The freed space at the bottom will then be taken up by the headphone jack, which will be moved from its existing position at the top of the current iPhone.
While the switch makes sense--some of the pins have become obsolete over the years as Apple has stopped supporting interfaces such as FireWire--changing the connector means that the iPhone 5 would not be compatible with the many third-party accessories in the market without an adapter.
It's likely that Apple would have prepared an adapter to support these accessories, though it's also quite likely that the adapter won't be free.