So the entire codebase was 'reset.' Instead of being based on XP, it would be based on Windows 2003 Service Pack 1. Although 2003 is itself based on XP, it had seen improvements in important areas such as reliability and security. That codebase also formed the basis for Windows XP on x86-64 platforms, so was probably better from a compatibility perspective, too. The development work on the old Longhorn wasn't completely scrapped; features from the old codebase were integrated into the new one, but this time they had to achieve much better standards of reliability and quality.
People keep saying Vista was Longhorn but it sounds to me like whatever Longhorn was, was completely scrapped. Which sounds like a good thing. I have to say, someone deserves the "big balls" award for tossing all the garbage and hitting the "reset button." That was some gutsy move.