The rumor about Google's phone has been around, and the recent New York Times article (Big Money in Little Screens) has confirmed it really does exist by saying:
Google has gone so far as to build a prototype phone with its own software inside, according to one person who has seen it.Now, this the first time I saw a photo of the concept design. To be honest I don't believe it is real. It's just too ugly to trust.
Source: Engadget Mobile