You should check out "In the Plex", the authorized Google biography.
It details this and how Google had been working internally on two paths for Android. They were originally going to go for the Blackberry style phone at first, but internally were working on "The Dream" which was the G1. Apparently, Android had been working on this pre-acquisition by Google. Levy wrote something to the effect of -- when Apple announced the iPhone, the Android team knew they had to ditch their plans and focus on the G1 to be competitive in a post-iPhone world.
It details this and how Google had been working internally on two paths for Android. They were originally going to go for the Blackberry style phone at first, but internally were working on "The Dream" which was the G1. Apparently, Android had been working on this pre-acquisition by Google. Levy wrote something to the effect of -- when Apple announced the iPhone, the Android team knew they had to ditch their plans and focus on the G1 to be competitive in a post-iPhone world.