Also, is this display limitation a function of the OS? In which case, shouldn't Cocoa/GTK or other versions not have this issue and be able to actually embed nicer rendering in there with nice fonts?
Is it? I'd much rather have proper HTML rendering in another window than a kludge "in my editor".
On my Mac for example, the text in Emacs is just as good looking (and in fact is indistinguishable from) the text in a native Apple application like TextEdit or Terminal.app.
Either the resolution of this screenshot has been scaled down in a way that makes diagonal lines jagged, or this particular Emacs has been configured not to use anti-aliasing of text.
Some Linux users prefer or at least are used to it that way.
On X, anti-aliasing (in the form of XFT) did not become available in an Emacs release till the relatively late date of Jul 2009. (It became available in pre-release versions of Emacs about 15 months before then.)