There's been an internal war of sorts within MS for years about this. They have had a long history of patching their own libraries and their own SO to fix bugs in software like SimCity... yes, they put special-case custom code in their own software to fix bugs in other companies' software. It was all in the interest of backward compatibility.
It was also short-sighted; that's not a sustainable way to go forward, because every one of those custom patches increases the maintenance overhead of your code, and it's not already stellar quality code, you're going to be in trouble... and MS was the epitome of the sweatshop, so there's no way that they had much if any good code floating around there.
Lately however, the other side has been gaining ground, leading to things like dotNET. They've willingly sacrificed backward compatibility in so far limited ways, which is a start in the right direction, IMO.
Since this project is in MS Research, it has a shot, but I suspect that if it were part of the standard development process at MS, it would take 90+ years, based on the story of the guy that wrote the start menu for Vista...
I think you're right; no matter what they do with the brand, I agree about windows. I don't think that they have as much time as they'd like, especially if Apple decides to get aggressive and teams up with Dell or PowerNotebooks or Boxx and starts expanding its OS marketing to take on Vista directly...