Paul Thurrot recently said that many people aren't correctly understanding this "merging" of OSes remark.
You are right to be sceptical. WP will not run Xbox games, or PhotoShop, nor will WP even theoretically be able to, because these OSes aren't really becoming one and the same. WP will never have the full Win32 API for example.
However, they will all share the WinRT APIs, and they will all share similar metro UI design guidelines, but not much more. At least that is what Mr Thurrot says. Sounds infinitely more believable to me too.
What you're hearing now is the usual confusion amongst consumers, when a software company talks about "merging". It's never what consumers think it is.