It looks like they're developing software, not the phone:
http://www.reuters.com/article/techn...27798320070322
SAN FRANCISCO (Reuters) - Google Inc. (GOOG.O: Quote, Profile, Research) is building software to run services on cell phones rather than gearing up to build its own phone, as many industry sources have speculated, one Wall Street analyst said on Thursday.
Piper Jaffray analyst Gene Munster said in a research note to clients that Google appears to be building software for Web search on cell phones and location-finding services to work with Apple Inc.'s (AAPL.O: Quote, Profile, Research) iPhone and other cell phones.
"We believe Google is working with, not against, Apple in the mobile world," Munster said...