I don't know what Intel were thinking either. Customer sees Pentium written on the new computer that they are looking at, thinks "Pentium is old crap". Customer then looks at e4xx c2d computers and thinks "these cost too much". Then customer sees Athlon 64 X2 computers and thinks "I know these are better than Pentium and I can afford one". And walks out of the shop with one. Losing Intel sales.
I guess it would have made more sence if intel had called the bargain basement processor Pentium V instead of Pentium Dual Core. Sure pentium IV wasnt Intels greatest achievement, but a lot of the general public still believe that Intel Inside is best, and dont have a clue about Athlon X2.
A large percentage of the people who know that the Athlon X2's were(are) pretty good chips are fairly likely to understand that the E2xxx pentiums are just rebadged Allendale/Conroe processors with some of the cache disabled, and a reduced FSB.
Personally I would have stuck with the Pentium name instead of Core Duo, which imho is a very 'weak' name. A few TV adds would have been enough to explain that P5 was twice as fast as P4 would have gotten the message across.