According to reports, Microsoft has lowered the price of Windows XP for PC makers that wish to bundle the aging OS with a new generation of low-performance and low-cost PCs which are sometimes referred to as Ultra-Low-Cost PCs, or ULCPCs. But there's a catch: In order to use XP on these devices, PC makers also have to agree to limit the capabilities of the devices so that they don't compete with mainstream notebook PCs running the more modern and capable Windows Vista.

While many are trying to make this move seem controversial, Microsoft's deal is hugely popular with PC makers, who are concerned that the emerging market for low-cost mobile computing devices will erode profits. By limiting the capabilities of these ULCPCs, PC makers can continue selling more capable machines for higher profits in developed countries while making lower cost machines available to emerging markets.

To date, PC makers offering ULCPC solutions have typically used the open source Linux software system because it is free. And Windows Vista, Microsoft's flagship OS, is too resource intensive and expensive to make headway in this new low-end of the market. As a result, Microsoft has reached a compromise: It will offer the older Windows XP Home Edition to PC makers at a discount through 2010, but only for use in ULCPCs that meet certain criteria. Microsoft will otherwise stop selling XP on June 30, 2008, almost seven years after the OS first became available.

To meet Microsoft's conditions, ULCPCs running XP Home must feature 10.2 inch or smaller screens, 1 GB of RAM or less, and work with certain single-core, low-performance processors, including Intel's new Atom CPU. They can utilize 80 GB or smaller hard drives and cannot feature touch-screen functionality. Those PC makers who sell such devices can purchase XP Home for about $32 per machine, or $26 per machine in developing countries.

Though ULCPCs are an unexpected growth area in the PC industry, they're not expected to rack up a significant portion of the market anytime soon. Different analysts have predicted that PC makers will sell from 9 million to 14 million ULCPs in 2008, up from just 500,000 units in 2007. But PC makers shipped over 250 million PCs last year overall, and that number will grow in 2008.