The video and the pictures are fairly convincing. The unit is real, though it may or may not be by Apple, and the software may or may not be some vapor sleight-of-hand. If it's a fraud, it's a very well-done fraud.
Here's the two major problems I see so far:
1) The name: someone pointed out that iWalk is not a registered Apple name. Also, the domain iwalk.com was registered back in April '97 by somebody else. Apple might be waiting until the introduction to register the name, but are they going to pay big bucks to buy the domain name from somebody when they could have spent $35 for a name/domain name that wasn't taken?
2) Cease & Desist: It's possible that Apple is not issuing a C&D order because they don't want to validate the rumor. Here's the problem with that theory: SpyMac showed us another handheld device called the iWalk several months ago. If this one is the real deal, then that one was probably an early prototype... why no C&D order back then? The picture is still available in their archives.