Presumably it also works on the iPod Touch?
Yes, same OS. Only difference is lack of camera (not relevant), lack of GPS (can locate itself reasonably accurately via wifi) and lack of 3G (but again you connect to internet via wifi).
Given that they are also producing apps for Android and presumably browser applets for the dumber 'smart' phones too, it does make sense. I would imagine that there are quite a few people that don't own a computer that do own a phone that can connect to the internet.. smartphones aren't going to go away, they're only going to get cheaper and more commonplace (err, pervasive is the buzz word I think).
Although it does look like it's more to be seen doing something than actually sorting out some jobs. Perhaps if the government hadn't encouraged a sham economy based on the city of London's phantom profts and run down the real economy in the rest of the country we wouldn't be in such a sorry state anyway… but that's another thread.