Microsoft has put themselves in a bad situation with the introduction Vista and 7.  If Windows 7 is a big improvement over Vista, many people are going to feel ripped off.   Millions of customers have recently bought a computer with an OS that is too slow compared to the available hardware.  If Windows 7 offers little improvement, Microsoft damages their reputation; it is a lose, lose situation for MS. The only thing that could save Microsoft's reputation is adding a service pack to vista (for free) that fixes all of Vista's shortcomings.  The problem with improving Vista would negate the need for a new operating system like Windows 7.

In addition to the above problems, Microsoft is facing severe competition. Apple's sales have doubled (some even estimate tripled) from an aggressive marketing campaign. Open source software like Linux has dramatically become user friendly in the desktop arena over the past few years. Even major manufacturers like Dell and HP are offering Linux on entry level laptops. Microsoft still dominates the desktop market, but their numbers are declining. It is almost impossible to measure the number of people using open source software since there are no sales records. http://distrowatch.com/ lists the hits that the different distributions get but not how many people have installed it.  The EU is requiring MS to offer Windows 7 without Internet Explorer.  The result is a delay with the European introduction and only full upgrade versions available for that market.

If Microsoft chooses to fix Vista for free, then their reputation can be repaired. Not really free since people have paid a large sum of money for the software along with years of updates and/or service from MS.