There was much anticipation for the announcement of a Google phone. What Google announced instead was Android and
Open Handset Alliance. Android is the open software platform based on Linux that Google will allow it partners to use to deliver services. As a result Android should compete with Palm OS, Apple, Microsoft, Symbian and RIMM. The ~30 member alliance is comprised of device manufacturers, component manufacturers, software companies, and carriers that have committed to working with Android.
With over a billion mobile handsets our there that are being increasingly used for search and commerce, this is the new frontier for Google ads. If this project is able to spur interoperability across these devices, it means more search queries from users and this is a good thing for Google :-) Given that Apple has a proprietary OS that is key to their strategy, I wonder if they would consider Android as a threat from their partner.