Microsoft Linux Over Windows Kernel
If you really think about it, there is only one reason Microsoft would put resource behind making a smaller, lighter, Windows kernel. That reason would be some version of Linux. The interesting thing about this is that since Microsoft has waited and watched Linux mature, it will probably be easy, with a few tweaks, to port X-Windows, Gnome, etc… over to a Microsoft Linux distribution.
What kind of crack are you smoking, you are probably asking. To understand this, I'll back up a bit an explain my thinking. So a while ago, Microsoft's server clients started defecting over to Linux. At first, Microsoft pretty much ignored this, and assumed they were looking for a free-handout. Then as more and more started defecting over to Linux, they tried this hearts-and-minds campaign where they started talking about the “real” cost of Linux. Then the latest was this suing FUD that Microsoft put out. I'm not sure this has petered out totally, but I think Microsoft realizes that the Linux community will not be frightened away.
So Microsoft, if they stick to their previous business model, will embrace and destroy Linux as they have Netscape, and Novell before. This happened with the browser, they ignored Netscape for a while, and when they really started to threaten their dominance as the primary application provider, they release IE. When they had finally had enough of Novell, they released Windows 3.11 for Workgroups and destroyed their market.
Microsoft's strategy will probably be that they will give away this kernel, with their open-sourced ports of X-Windows, possibly Beryl, etc… all running on the .net framework 3.5, which also is open source, and on this MinWin kernel. It will probably also have virtual server, or virtual PC available for it so that you can still run your legacy Windows applications in Microsoft Linux seamlessly, if they are smart, and they are, they will even port Direct X.
The affect this will have is that while die hard Linux geeks will remain on the distro of their choice, the middle of the road geek who wants to keep gaming, but is tired of the bloat of windows will probably embrace this new Windows. Microsoft may be down, but they are not out.
The danger of this is that people may lose interest in Linux as a serious desktop competitor, due to the fact that it will never run Windows applications easily, at least not as easy as Microsoft Linux. The business server crowd will definitely embrace this Linux since it is from Microsoft and will probably have a high level of support. Obviously it will run some new version of exchange server, and probably Apache, PHP, and all of the other general software that people run on Linux. In fact, in every way it will probably be just like any other Linux distribution, you will make / install your software and be off to the races.
Watch Microsoft here, it looks like they are playing for keeps.