Open Source Licensing – Difference Between BSD License and Public Domain

First, a terminology correction, the word you are looking for is "proprietary", not "commercial". Open source software is commercial in every sense of the word. It is created by businesses, sold to businesses, and used by businesses. This is true in practice and was so recognized by the courts in an important legal case.

As for the license you are asking about, go to http://www.opensource.org/licenses/ms-pl.html and read the text. (Note that the license was created by Microsoft for use in software written by Microsoft - which is not known as a charity. That is commercial software.) Reading section 3.D. it is within the rights granted by the license to distribute a compiled binary including that software, however you have to abide by the terms of the software. So, for instance, you can't use the contributor's name, logo, etc for your software. (Odds are that the contributor is Microsoft.) It should be very easy to to comply with that license. But if you are in serious doubt about whether you are complying, consult with a lawyer.

To answer your questions:

Is this the right approach? Maybe, if your changes are generally useful I would attempt to contribute to the project instead of forking.

Can I fork this project? Yes. The BSD license allows you to fork it. You don't need to ask permission to fork.

How to track changes...? Add your name to the copyright notice for the files you changed. And make sure it is in files you add. If you want more details your SCM tool will keep track of who changed what.

What must I do before releasing...? If you are releasing the source the copyright notices in the source is enough if you are releasing binaries make sure the original copyright notice is in your supporting documentation.