The most popular Linux distribution (according DistroWatch.com) on desktop, Ubuntu, is aiming on the embedded market. They aim their embedded distribution mainly on devices which are called "Internet tablets" or "mobile Internet devices".
Currently the target is on Intel platform called MID (Mobile Internet Device) and available devices such as Samsung Q1 Ultra, HTC Shift and Elektrobit EB MIMD. The distro will aim on Intel based system leaving for example ARM based devices like Nokia N800 out of the scope.
About the project itself. It tries to use existing software as it's base, but is not afraid to implement it's own applications when suitable one not available. It's intresting that the project took Hildon as it's UI framework. Hildon is originally developed by Nokia for it's maemo platform. However, Hildon is open source and such thing is possible to do and kind of open source spirit, and in the line with the policy to use existing components if availble.
They're targeting to release first version with Ubuntu 7.10, meaning very soon from now. As I see these Intel based devices are yet to come to the markets and we'll not see this in use in this year but in a year or two those devices with Ubuntu's embedded version might be a everyday. Only the time will show...