1) I agree on all accounts except for where you say they can't contend. They have a good rotation where Garza is being replaced by the returning Francisco Liriano. If they add a little bit of pop to the order (like they have with Delmon Young), they can cause problems for some teams.
2) I agree that they probably want to get a deal like this done when they have a bit more privacy, but the Twins don't have to give Santana up. They can still get something for him at the trading deadline if they're not satisfied with what they're seeing now. It's certain that a contending team will inquire about him at the deadline - and even then, maybe the Twins WILL be contending. If that other team that comes to the Twins is serious about winning it all in '08, then they may just pony up the prospects for the banner that they want. As far as the picks go, though, won't they get 2 picks if another team signs him anyway, since he's obviously going to be a type-A free agent?
3) Yes, they've put together a nice package. But we're talking about the best pitcher on the planet right now, and if the Twins are even slightly hesitating at what they might receive, then I don't blame them for balking. Whenever you trade for top-quality prospects, you're trading for question marks with high ceilings. The question isn't whether or not they're going to get a good prospect, but how much faith they have in whether or not the prospect will find success. As far as those deals you mentioned go - at the time, those pitchers weren't the best on the planet. Damn good, but not as good as Santana. We're talking about a proven, year-in and year-out, dominant starter that is in the Cy Young race every year. His credentials at this point are a bit more impressive than those of the other two at the time of their deals to the Sox.
4) This is where I don't agree with you as much. The Red Sox do not have a desperate need for Santana. Sure, he'd be AMAZING to have, but the Red Sox are ALREADY arguably the best team in baseball. They're the defending world champs, and basically the same team. Santana to the Red Sox is just gravy - a damn lot of it, but the Sox do not need him as much as some people make it out to be. I do not trade Lester and Ellsbury for him in the same package.