According to a trusted Gizmodo source who's seen it with their own eyes, the Google Phone 'is a certainty'.
Over the next few weeks, Google Phones (most probably in early, prototype form) will flood the Mountain View campus. They'll don large LCDs while running a new version of Android—either Flan or the version of Android beyond it—which our source spotted running on Google's handset as well as a laptop. (Whatever the software was, it most certainly wasn't Chrome OS, we were assured.)
Interestingly the source was told that the current Android, is not the "real" Android.