I have resently been working on a project for the arduino, called Arduputer. With the project i intended to see how much the arduino could do. The current sketch is about 13kB.

On the arduputer I have several programs including a text editor, a simple ocilloscope and a program that shows available ram on the Arduputer.

I have modified the Ps2 keyboard library and the GLCD. In the GLCD library I added a routine for showing a picture. I used Bitmap2LCD for converting it from bmp to bitmap. The routine is a little wired  so if you are going to convert a bitmap yourself, the settings are.

Paging Scheme vertical downwards
Most significant bit last
Origin corner top left

The project is licensed under gpl.

Source code can be downloaded http://cid-2f5b47d76e2e632f.skydrive.live.com/self.aspx/.Public/Arduputer.zip.

Here is a demo video.
http://www.youtube.com/watch?v=BC0f540nkq4

Edited:

Very interesting! For how long did you work with the project?

Very nice project!

So have you actually put Linux onto the chip or did you just use the Linux penguin as a graphic?

I see. Cool project btw. Why not get a PSP colour LCD screen and go the whole hog? The amount of memory on the new 328 chips should be mroe than enough to put an OS onto.