Speculation regarding a possible mobile device, the gPhone, to be released by Google first surfaced late in 2006.
The rumours originated from Google's very quiet acquisition of Android in 2005, a mobile software company started by Andy Rubin. Andy's team is now working hard at Google on a new Linux-based mobile device operating system which they are currently demonstrating to handset manufacturers. So the latest information seems to indicate that the gPhone is not hardware but rather software, no doubt with excellent integration with Google's services!
Furthermore, Google has filed for a gPhone payment patent called gPay which allows users to send a text message to Google giving details of a payment to a specified recipient. gPay then debits the user's bank account and credits the money to the payee. It has also been suggested that Google might offer an ad-supported phone service where users view a 10-30 second advertisement before making a call and banners on screen while browsing the internet.
This is an interesting development as I doubt Google have decided to produce their own mobile operating system just to mimick what is already available, there must therefore be some interesting features or a new user experience that Google has developed which isn't currently available to mobile users.