It has been circulating the web recently about a flaw in Windows 7 security (see http://www.f-secure.com/weblog/archives/00001675.html)
The fact you can name a file virus.txt.exe and only see the virus.txt and the application can change the icon to match this is not a flaw.
In most cases it will not let you execute the program if it has come from an unsafe location, eg removable media, the Internet, as you will get a lovely pop-up warning you that its a possible unsafe file, and asks if your sure you want to execute it. So for this flaw to be taken advantage of, the file has to be put on the computer, and marked as safe or trusted.
So is it a flaw? No
Do people take more notice of the icon than the extension? Yes
Is this just nit picking because Microsoft’s OS is finally (most probably, no major exploit has been found in Windows 7, and Vista only had the Conflicker one which was a known issue) as secure as OS X or Linux? Yes, I think so.