Engadget claims the device sports a "1GHz Qualcomm MSM8655 (a chip similar to the one found in the [T-Mobile] G2, but 200MHz faster), 512MB of RAM, 1GB of ROM, and the screen is in the range of 3.7 to 4.1 inches," with Android 3.0 the likely choice of OS. A 2010 release is possible, but 2011 seems more likely according to Engadget.
Others are not so sure and claim that the images are fake. The most questionable piece of evidence is that one screenshot (seen above) references 'A' and 'B' buttons, which of course, do not exist on a PlayStation pad. Engadget offers the explanation that the prototype pictured is not yet running Sony's modified software.
Sony Europe has said that the images are "definitely fake" and followed up with the standard "we do not comment on rumor and speculation," when asked about the specifics in the Engadget story (via GameSpy).
It certainly seems like a product that has some business existing, but the legitimacy is still suspect. Engadget went out of its way to post a second story claiming that it is definitely real, but it's just too hard to tell at this point.
If this is a real product, it certainly seems like it will be more phone than PlayStation Portable. It will be interesting to see what this device might do for Android gaming if it is real.