Specifically, Facebook wants to integrate deeply into the contacts list and other core functions of the phone. It can only do that if it controls the operating system. Two high level Facebook employees Joe Hewitt and Matthew Papakipos are said to be secretly working on the project, which is unknown even to most Facebook staff. Both have deep operating system experience.
Hewitt is known for creating the native and web based iPhone apps for Facebook; however, he also helped create Firefox and was on Parakey, a web-based operating system, before Facebook acquired the company.
Papakipos led the Google Chrome OS project until June but then quit and moved to Facebook. TechCrunch suggests that he would not have left the project before its completion unless something really interesting lured him away. Something like a Facebook Phone, for example.
Arrington theorizes that the phone will be very affordable (less than $50), lower end, and fully integrated into your Facebook world.