I have advanced with the iPaq project and successfully compiled the kernel. For the build process I used cross compiling on my desktop system. The cross compiling itself is quite simple operation, but there's some little thing to take in acccount. We need only binutils, Kernel headers, compiler and glibc. So let's start.
Compiling binutils is easy, just "./configure --target=arm-linux", make and make install. It install required tools under /usr/local/ and creates directory arm-linux under it. Next we need kernel headers. Just make directory /usr/local/arm-linux/include and copy include/asm-arm from the Linux sources as asm to under it, include/asm-generic and include/linux as well. Then symbolic link from /usr/local/arm-linux/include to sys-linux.
Glibc I took from Debian repository, downloaded proper deb-packages, opened it (ar x package.deb), untarred the data tarball to temporary directory and copied the lib and usr/lib directories contents to /usr/local/arm-linux/lib. Another option is to compile glibc yourself from the sources but since I wanted to use Debian prebuilt binaries as much as possible and keep this as Debian based solution so this is the better way.
Then we need a cross compiler. We need gcc sources and compile it for arm using "./configure --target=arm-linux --disable-threads --enable-languages=c" and traditional make and make install. However I got problem with libc.so.6 and had to change contents of /usr/local/arm-linux/lib/libc.so (it's text file) to point to files under /usr/local/arm-linux/lib/ instead of /usr/lib/ (or wherever they point to). After that compiling was successfull out of the box. Now testing with the Hello World example (arm-linux-gcc hello.c -o hello) and see what file tool said about it. It should show that resulted binary is for ARM.
Finally the kernel. You must remember that we're cross compiling so we need to give some arguments for the make. First configuring the kernel "make menuconfig ARCH=arm CROSS_COMPILE=arm-linux-", making proper choices (SA-1110 and iPaq 36xx most important) and optimizing for embedded device. Saving the configuration, and finally "make ARCH=arm CROSS_COMPILE=arm-linux-". Never forget those parameters ARCH and CROSS_COMPILE. I did. I had to make some recovery (untar the kernel arcive again) to get back to proper architecure. I got the kernel compiled finally properly. The final result was 1.6 megabyte sized kernel plus the modules. But wait a minute, we have option to pack the kernel, so "make zImage ARCH=arm CROSS_COMPILE=arm-linux-" and (drums please) we got 760 kilobytes sized kernel. That's under a megabyte which was the target.
Next I'll try to build some system and make some minimal system image ready to be flashed to the device. It'll take some time, but what's the horry? Be seeing you.