It appears Microsoft has finally gotten around to making the Windows Time service into a "real" implementation of the network time protocol in Windows 2003 SP1 and later. The half-baked Simple NTP system of earlier Windows versions kept poor time (it would often drift by as much as a full second) and had troublesome interoperability characteristics, reporting the incorrect stratum amongst other issues.
My week-long tests indicate the updated service keeps time to within about 15 ms of a "real" NTP server configured with the same set of Stratum-1 sources. This is about the resolution of the Windows system interrupt timer (1/64 second). The updated service also seems to report the correct stratum, which server it has selected for synchronization, and a seemingly correct resolution value of 2^(-6) seconds. Here is a chart showing the performance relative to a server running ntpd.
Of course, diagnostics are still terrible in this updated version, so my only recourse is to monitor the new Windows Time Service with the tools available on a system running the standard ntpd.