Since there are tons of compatibility issues with Linux, I am thinking about making a free version of Windows.

There are free versions of DOS, and Windows is practically have DOS as its terminal and internal functions (correct me if I'm wrong )

Say that we add a graphical interface and add some more functions (libraries, etc. ), will we be able to run a normal Windows software on it?

You might want to ask these guys http://www.reactos.org/ how easy/hard that is .

...

Which Windows?

IIRC you can install Windows 3.1 on top of FreeDOS.

Also, note that the Wine project has implemented a substantial amount of the Windows API.

Frankly, if I've got something that "runs on Windows," I actually don't mind paying Microsoft a license-fee. I've got a couple of machines here that are used for running Windows, and I've set up some in virtual machines. All bought and paid-for, and I've never had any problem with that notion.

Both Wine and ReactOS are very informative projects, though, because by reverse-engineering some of what Microsoft did, they greatly enhance your understanding of how the APIs actually work – bugs and all.

thanks for all the insights!