Good article analysing the Microsoft strategy behind Longhorn. Seems accurate to me. The Gates quote put it in a nutshell:
"The personal computer in less than three years will be a pretty phenomenal device," Gates said. "Exploiting the client, delivering data in the form of XML to the client and then having local rich rendering while still being able to have mapping to HTML for reach--that's something we're making very simple."
A return to the rich client is critical for the survival of Windows and to demonstrate it's value over and above Linux. To enable this, it is conquering the deployment problem with .Net and Longhorn. The Microsoft strategy will always be to exploit local processing and use the client as an integration point to provide extra value.
I don't see the Open Source/standards-based world offering anything to compete with this application model (let me know if I'm missing something!). I guess Xforms is a small step in the right direction.
Likewise, on the server side, Microsoft eventually has to tackle the Grid Computing problem and innovate on the server programming/deployment model before Linux commoditises server functionality.