But, they would have to release the OS for free if it is based on the Linux kernel, so I could run a MS OS legally.

And, this might not be the worst thing for Linux. MS would guarantee that there was a group of programmers, not just hackers, on the project, so more things would be supported under Linux, whihc could allow for the greater progression of the whole OSS.
OK, I'm done giving MS head. :p
-bZj