Nothing has officially changed with Microsoft’s position that Windows 7 Starter edition will only run three applications simultaneously, but  rumors that surfaced last week that the limitation would be scrapped will likely become fact…and shortly. System utilities and multiple windows open in a single application do not count toward the limit.

That the limit was still official was according to Microsoft director of netbook PC marketing Don Paterson and senior Windows product manager Stefan Kinnestrand. I interviewed them together for an hour Wednesday to figure out what consumers will be see on netbooks when Windows 7 emerges this Fall in time for the holiday shopping season.

Here’s what we know…or knew. Windows 7 Starter Edition will be preloaded onto certain netbooks, mostly the ones with least power, the fewest features and the lowest price. If users wish to upgrade, they can choose the WAU or Windows Anytime Upgrade just like with Vista.

Assuming that the three app limit goes away, Starter and WAU could become history. The question becomes does Starter go away or does it just lose the limitation. Or something else.

“Users can upgrade their machine to Home Premium in 10 minutes or less so there is no buyer’s remorse,” says Paterson, still behaving as if the limit will be in force when Windows 7 debuts in the Fall (it won’t). Pricing for the WAU or any Windows 7 versions has yet to be announced. Paterson tried to allay fears about the three application limit especially given how smoothly Windows 7 Ultimate already runs on netbooks (see my review).

“Usually when we do a demo, the reaction is much less onerous when you see it person than read about it in print. A dialog box informs the user they have to reached the maximum number of applications and must close one [to launch another,],” says Paterson. ZDNet’s Ed Bott does a nice job listing all the exclusions and has screen shot of the dialog box that warns “Maximum Number of Programs is Already Open.”

However, my sources indicate this will shortly be history when “rumors become fact REALLY soon” which I take to be imminently. Clearly placing such a false restriction on Windows 7 posed tremendous risk for Microsoft which faces competition on netbooks from Ubuntu and Android.

The two primary versions of Windows 7 are Home Edition which presently differ from Starter in that it has richer media features and no application limit. Windows 7 Professional is aimed at small business and work at homers who function within an IT environment and thus require certain security features. Microsoft officials have been on record saying these two versions will make up 80% or more of the market. A third version, Windows 7 Ultimate, is the current release candidate combines all the features of the Professional and Home editions.

“There was a couple of things we wanted to do with Windows 7 such as making sure it runs well on all PC hardware, that it shuts down faster and to make we optimize the memory and storage footprint. The second goal was if to offer wide choice and that it has entry level, premium or professional experiences,” says Kinnestrand.

Choice, however, will be as important for retailers and PC makers as it will for consumers, according to Paterson.

“If you’re Best Buy, you think price points like $100, $249 and $399. [Starter] will better enable the lower end of the category,” he says. “It’s up to the Original Design Manufacturer (ODM) and Original Equipment Manufacturer (OEM) how they want to build [netbooks]. They can run different editions to create offerings at different price points,” he says.

The pair also believes that netbooks still have headroom to grow even though some have “morphed” in what more accurately could be described as notebook PCs.

“The underlying assumption is that netbooks are small PC notebooks. Users [with Windows 7] will no longer have to distinguish between notebooks and netbooks. We are optimistic about growth rate through the next year,” says Paterson, who adds that the theme for netbooks this holiday season will be “thin and light” which are two characteristics we’re to already seeing in netbooks introduced during the past month.

What’s more, he doesn’t see price as the dominant factor in netbook buying decisions.

“The economy has played a key role in the low cost nature of netbooks, but the data we look at isn’t just about low price. Netbooks are companion PC devices. [Typical buyers] make more than $75,000, are in their forties and tend toward the $399 and $449 price points. By and large, the data we see is that people are not driven by price [with netbooks].”

Windows 7 will also push the notion that netbooks serve as companions to more powerful notebooks or desktop PCs. According to Kinnestrand, that’s why Microsoft built Homegroups into Windows 7 (I want to play with Homegroups, but I only have Windows 7 installed on one netbook at the moment. It promises to allow users to share file and media libraries between Windows 7-based PCs).

If Microsoft is nervous about the emergence of Linux variants Ubuntu or Android on netbooks, they are not showing it.

“We have 97% share in the U.S. and more than 90% in 15 of the 16 geographies we track. Windows has a billion users. Ultimately, consumers are drawn to familiarity and compatibility. Android has the same flaws that any Linux variant – lack of compatibility and an unfamiliar user interface,” says Kinnestrand.

[In the name of fairness, I have contacted the Android folks at the Open Source Project to their side of the story, but have not heard back.]