Tom, it definitely appears to be some kind of multiplexer. The RAM chips in the picture are indeed upgraded 256 on a stock 128K board (though why they did not socket them I have no idea). However, this is one of the simplest, if not cleanest, upgrades I've seen with a few wire jumpers going to the decoding circuitry and a matching chip piggy-backed on top of an existing chip (no higher than a socketed chip). All the other solutions I've seen involve a custom mini-mux board (some nicer than others) mounted in some free space on the LB, usually sticking up higher than anything else.
This brings up an interesting question for me. With consumers demanding more RAM within weeks of the 128K's launch, why did Apple take the time to redesign the 128K board, test and fabricate a new hybrid board? Why not just design a custom IC multiplexer chip to plug into those E3 holes on the board? Was anything else changed about the 128K/512K board over the original that would constitute a "necessary" improvement? As far as I know the 512K board is no faster or more efficient than 512K upgraded 128K boards. It's not like the new board was harder to upgrade to 512K (in fact it was easier), so OEM upgrades would have still been a profitable path for Apple. Even if Apple wanted to redesign the board at some point, a simple chip would have put the 512K into the market as soon as sales began to slump, or sooner if they wanted to.