It is for real...I installed it on my UMP2000, with the ATA CF mod, so I could get the songs to fit. Yes, you had to encode at a very low rate, and yes, that speaker is not that great.
Regarding headphones, a couple of people hacked their newts to put head phones in (the eMate actually has a headphone jack).
The biggest obstacle for most people now is you need iTunes for OS 9, IIRC.
I don't think it's a spoof, it's been there for ages, and the newton can play MP3, so why not.
Of course it's a spoof, and all the better a spoof because it is technically just about possible to make a Newton do it. Why you would want to listen to your mp3s on that little speaker is another question.