heavily limited since it will only run Linux
Heavily limited by ONLY running Linux? There are other OS's that will run on ARM but Linux remains the obvious choice. Linux has so many advantages over Windows when running on a small platform like this that I don't think you'd really want to consider Windows for such a thing. A well setup Linux base would allow this to be used as the base for a lot of things. Gettign a good distro base would be key. Gentoo would be a good choice for tuning to the platform and a Portage Overlay with all the binaries as well as source would be ideal to prevent taking 3 days to rebuild everything after any upgrade!
I do wonder if Raspberry Pi would be open to commercial partners? It could find use embedded into appliances.
I agree. Linux with a Window Manager would be fine for most needs (Email, webbrowsing, some media playback). For heavy duty stuff you can always fire up an old desktop PC with more horsepower.
Some things to take into account when choosing a linux distro for the Raspberry Pi:
1.) the CPU is ARMv6 with VFP (hardware floating point).
Debian supports ARMv4+ with software floating point (= slow when float is required), or the new armhf arch for ARMv7+ with VFP. Unfortunately this means that you're forced to use the old armel arch with software float when using Debian on the Raspberry Pi. Ubuntu is restricted to ARMv7+ with their current distribution afaik. The only distribution I've heard that will support ARMv6 with VFP is Fedora. So to get maximum speed (without recompiling) you'll need to run Fedora or another distribution that will be precompiled for ARMv6 with VFP support.
2.) 256MB RAM means you need to use a real light-weight windowing manager. Think of LXDE, XFCE, Fluxbox, etc.
Xubuntu/Lubuntu are often quoted as examples of how XFCE and LXDE should NOT be implemented because of all the included bloatware in these Ubuntu variations. A good XFCE or LXDE system easily can get below the 100MB RAM mark on startup from what I've read on forums.
You will also need to carefully chose your programs to match the limited RAM. I suppose proper comparisons will pop up when Raspberry Pi grows a wide and established install base.