It seems they are heading in a different direction. While keeping Windows 7 on the old platform they are working on another project called “Midori". Sources say it's in “incubation," which means it's on a fast track to being turned into a product.
Does this mean that “Midori" will replace the Windows platform any time soon? No. If and when Microsoft does make this project into a commercial product, it will run parallel or alongside Windows for several years.
Why? Well looking back at history, in 1993 Microsoft came out with Windows NT. NT was abbreviated from New Technology and for almost for a decade Microsoft built and ran the consumer OS and business OS (Windows NT) in parallel. In 2001 when Windows XP was launched the old line (consumer OS) was stopped and the “New Technology" was made mainstream for all Windows users.
It took a while before Windows NT was considered acceptable for desktop use and it took even longer before Windows 2000 achieved widespread acceptance by users. In that time Microsoft kept on shipping millions of Windows licenses using its “old technology" OS.
So Midori has the potential to coexist alongside Vista, Server 2008 and Windows 7 for at least 5 years. Just like with NT there will be customers willing to use the new OS for specialized reasons such as a powerful workstation or personalized hub for home entertainment.
It is unlikely that the new platform will achieve any critical mass until the early adopters have used it for years and identified the shortfalls. It is also unlikely that retailers will want to accept the burden of selling and supporting a completely new platform until early adopters give it the seal of approval.