The New York Times has published a solid summary of the past and impending Lindows/Microsoft litigation (Glass Panes and Software: Windows Name Is Challenged).
The litigation essentially hangs on the generic mark doctrine. In the trademark world, a term is generic if it describes a class of goods or services, rather than a specific instance of the good or service (the class/instance distinction in object oriented programming languages provides an intuitive parallel). Generic terms can't be trademarked for the simple reason that, if they were, customers would not be able to distinguish a particular product by a specific merchant from the same type of good or service offered by another merchant. If the word "car" were a trademark for an automobile company, for instance, and I offered to sell you my car, what would I be selling you--an automobile in the general sense, or a specific type of automobile? It'd be difficult for you to make that determination; hence the restriction. Following the same logic, I couldn't receive trademark protection for an OS called, conveniently, "Operating System".
In this case, Lindows claims that "windows" is a generic term, since the word was originally used to describe generic GUI architecture (on-screen windows), rather than Microsoft's particular flavor of the interface. If the court agrees with this argument, Lindows not only will not be guilty of infringement or dilution, but Microsoft will not have an exclusive right to the use of "Windows".
In response, Microsoft can argue that "Windows" -- the product -- is more than just an interface; or the company can claim that continuous and exclusive use of the term has given it a "secondary meaning" which customers identify with the product, rather than a category of service. Indeed, with regard to descriptive terms (e.g., "unstable"), the Lanham Act specifies that prolonged and exclusive use of a term by a company can be construed as prima facie evidence of the existence of a secondary meaning. Perhaps similar logic can be transplated to generic terms.
In any case, Microsoft's original motion for a preliminary injunction was denied, so evidently the court thinks Lindow's claim might be colorable. The trial is scheduled to begin in April.