That Google Chrome OS counter Microsoft was supposedly working on could be this Gazelle browser, which wants to treat the browser more like an OS.
The Gazelle prototype is supposed to do stuff like protect webapps from each other, and isolate different browser tabs (like Google Chrome does now and Firefox is going to do). It's one of the many, many research projects Microsoft has incubating, but might be the one that they trot out next week to show that they're still in the loop in terms of keeping up with Google.
What it won't do is replace IE—at least not in the short term. [CNET - Thanks tipsters!]