Yes, this is all getting ridiculously complicated, and part of that is caused by Microsoft's categorical inability to properly name most of their products. Microsoft is in the middle of renaming its embedded range of products, meaning the the version following Windows Embedded CE 6.0 is named Windows Embedded Compact 7.
And this new version is what Windows Phone 7 is built on, says Microsoft's Olivier Bloch. In other words, Microsoft skips Windows Embedded CE 6.0 for its mobile phone operating system, opting to go for the latest and greatest version. Whether or not this is a good idea remains to be seen; no information about this new version has been made available yet, so we don't know just how much has been changed.
Boch states that Windows Phone 7 "is based on the Windows Embedded Compact 7 core", meaning that it's probably been heavily customised for this purpose. Engadget asked for clarification from Microsoft, but this only made things less clear:
Engadget argues that this rather verbose answer means that Windows Phone 7 indeed started out using Windows Embedded CE 6.0, but that over time, as Windows Embedded Compact 7 (I'm feeling dizzy) matured, they slowly but surely switched to the newer product. It will be interesting to find out what new features this version will bring. Bloch states that more information will be released over the coming months.