Yes, Google is reportedly in the process of testing a hardware device in the homes of some of its employees. With pieces of information floating in the internet, it looks like the device is most likely a android powered WIFI enabled entertainment (music, games??) device. Google expects to fine tune the device based on the feedback from the initial test reports in the home environment.
The anti-Google guy, Mr MG Siegler seems to be interested in this.
Whether Google to trying to build an end-to-end supply chain with direct sales of the product (as it did for its Nexus one) is left to the everyone’s imagination for now. Its exciting to see the internet giant exploring new opportunities outside its core business.