Microsoft will be offering steep discounts to PC manufactures that will use Windows XP in ultra low-cost desktops and notebooks. However, the discount comes with limitations, as Microsoft will be placing hardware restrictions for these manufacturers.

In hopes of fostering adoption of Windows over its Linux competitor, Microsoft will offer steep discounts of Windows XP Home Edition for ULPC desktops and notebooks like the Asus Eee PC or OLPC. The new program ask manufacturers that screen sizes on notebooks be smaller than 10.2 inches, touch screen not be used, hard drives should be under 80 GB, contain less than 1 GB of memory, and a single-core processor that clocks less than 1 GHz. The program has provided exception for pre-determined chips like Intel’s Atom and Via Technologies’ C7-M processors.

Microsoft’s goal is to limit hardware capabilities of upcoming generations of ULPCs so they do not reduce the demand for modern PCs with capable hardware. The limitations allow “PC makers to offer low-cost alternative, and it prevents eroding of pricing and margins in the mainstream OS market,” said analyst Roger Kay, EndPoint Technologies Associates president.

Microsoft’s program is expected to launch in June. Prices will reflect the market or country’s wealth. First world countries will get Windows XP Home Edition at $32, while developing markets such as China or India will only pay $26.

The surprising success of the Eee PC has forced many OEMs to quickly produce its own ULPC. HP recently launched its Via based Mini-Note, hoping to cash in on the growing market. Over twenty new designs of ULPCs are expected to launch later this year.

Microsoft had earlier announced its plans to stop selling Windows XP to OEMs after June 30, but ULPC has been noted as the exception.

The reduction seems more like an attempt at making Windows XP ULPCs less attractive than say, a more recent ULPC unit that would ship with Windows Vista.