Apparently, this was an ultra-secret pet project of Larry Page. I still believe the time is not right for such a product, and it presents a strong conflict of interest for Eric Schmidt (CEO of Google) to be on the board of directors of Apple.
I will say that the Google phone is not too much of a threat to the iPhone in that the iPhone targets style conscious consumers while the Google phone targets geeks and perhaps business people. We’ll see just how real this phone is when Google announces something officially.
People must keep in mind that Google must have thousands of products that don’t make it into production. While this product is more likely than others to appear on the market due to the backing of the founders, I don’t think it is poised to dominate the market, or even take a significant hold (at least today).