MaryJo Foley has reported this project accurately in early 2010
http://www.zdnet.com/blog/microsoft/could-menlo-signal-a-change-in-microsofts-mobile-strategy/6077

But Microsoft showed a prototype of Menlo with CE kernel, which debunked the rumor
http://www.zdnet.com/blog/microsoft/microsoft-research-shows-off-a-prototype-menlo-mobile-phone/7029
http://www.engadget.com/2010/08/09/microsofts-menlo-is-a-windows-ce-device-nothing-to-see-here-fo/

Now, the real Menlo has been revealed, lets give some credits to MaryJo Foley, she rocks. Angel