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Jeff D.You pretty much have it. Topps issued t206 style cards as a 2002 product (like their 2005/2006 Turkey Red, Heritage releases, and the soon to be released Upper Deck Goudey set). Randomly inserted were some original t206 cards "encased" inside larger Topps made cards. They also did a t205 set with original t205's, and currently have Allen & Ginter where they do the same.
Condition is all over the place, but the originals aren't usually in very good shape. Paper loss (also heavy creasing, stains and pencil marks) seems to be common on many of them. You'll also pay more than the t206 cards inside are really worth, since people like the novelty of having an original old card inside a new card.