Microsoft has loosened the hardware restrictions that PC makers must adhere to in order to install Windows XP on ultra-low-cost PCs, according to documents seen by IDG News Service.

While June 30 marked the last day for selling most new Windows XP licenses, Microsoft has made several exceptions for the older operating system, including its use on ultra-low-cost laptops such as the Asus Eee PC, as well as on an emerging class of mini desktops. These devices are sometimes called netbooks and nettops.

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Microsoft is offering Windows XP Home Edition to encourage PC makers to use that OS instead of Linux on the low-cost machines, but it places restrictions on the hardware that can be offered.

Under the new terms, outlined in the documents, PC makers must limit screen sizes to 14.1 inches and hard-drive capacity to 160GB. ULPCs with touchscreens will also be eligible. Earlier terms set in April did not allow touchscreens at all and limited screen sizes to 10.2 inches and hard-drive capacity to 80GB. The processors are still limited to a single-core chip running at no more than 1GHz, and memory is limited to 1G byte of RAM.

ULPCs are an emerging class of products with limited system capabilities in the $250 to $500 price range. Examples include the Asus Eee PC and MSI's Wind. They are designed for basic tasks like surfing the Internet and sending e-mail, but not for more advanced tasks like video editing.

The updated terms, especially the larger screen size, mean Windows XP can be used on machines that look more like standard low-cost laptops. But ULPCs are not only defined by their size, and they remain a distinct product category due to their limited performance, said Roger Kay, founder and president of Endpoint Technologies Associates. "You can have a low-cost PC that's not small," Kay said.

The goal of the program is apparently to limit the hardware capabilities of ULPCs so that they don't eat into the market for mainstream PCs running Windows Vista, something both Microsoft and PC vendors would want to avoid.

As part of the new terms, Microsoft also added low-cost desktops to the list of products eligible for Windows XP Home, and it added Windows Vista Home Basic as a second OS option.

Microsoft declined to comment on the matter, saying it doesn't speak publicly about the details of its agreements with PC makers.

Low-cost PC vendors may be pushing Microsoft to keep Windows XP available, Kay said. Linux is another option for ULPCs, but is not yet a viable alternative, according to Kay. "I don't think Linux is going anywhere in the low-cost market," he said. "Linux doesn't really cut it when it comes to compatibility."

The documents show that for developed markets, Microsoft charges $32 to install XP Home Edition on standard netbooks, and $47 for netbooks with the larger screens. PC makers who meet certain requirements in Microsoft's Market Development Agreement can get a discount of as much as $10 on those prices, the documents show. There is a similar discount for systems sold in emerging markets, although the starting prices are lower, at $26 and $43.