Microsoft is launching a program to promote the use of its Windows OS in ultra low-cost PCs, one effect of which will be to limit the hardware capabilities of this type of device, IDG News Service has learned.

Microsoft plans to offer PC makers steep discounts on Windows XP Home Edition to encourage them to use that OS instead of Linux on ultra low-cost PCs (ULPCs). To be eligible, however, the PC vendors that make ULPCs must limit screen sizes to 10.2 inches and hard drives to 80G bytes, and they cannot offer touch-screen PCs.

The program is outlined in confidential documents that Microsoft sent to PC makers last month, and which were obtained by IDG News Service. The goal apparently is 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 the PC vendors would want to avoid.

Imposing the limitations solves a number of problems for the PC industry, said industry analyst Roger Kay, president of EndPoint Technologies Associates. "It allows PC makers to offer a low-cost alternative, and it prevents eroding of pricing and margins in the mainstream OS market," he said.

Microsoft declined to comment on the documents. "We don't speak publicly about our agreements with [PC makers]," the company said in a statement via its public relations agency.

ULPCs are an emerging class of laptops that carry low price tags -- about $250 to $500. Early examples include the Asus Eee PC and One Laptop Per Child's XO machine. The systems already have limited hardware configurations. Microsoft's program appears designed to ensure that distinction is maintained and to prevent ULPCs from cannibalizing sales of higher-end systems, Kay said.

Twenty or more other designs are expected to enter the market over the next six months, and Microsoft expects 10 million to 13 million of the devices to sell this year, according to the documents. IDC's forecast is more modest: On Thursday it said it expects ULPC sales to hit 9 million units by 2012, up from 500,00 last year.

Microsoft notes that the OSes under consideration for the devices include Windows and Linux. Some PC makers have expressed a preference for Linux because it helps them keep down the cost of the devices.

Microsoft says PC makers are keen to enter the market but want to keep ULPCs as a distinct category from "value" and mainstream PCs. The company's new program, scheduled to launch by the end of June, is designed to help make that happen.

Microsoft plans to charge PC makers US$26 for Windows XP Home Edition for ULPCs sold in emerging markets such as China and India, and $32 for those sold in developed markets, the documents show. PC makers who are eligible for its Market Development Agreement, however, can get a discount of as much as $10 off those prices, the documents say.

That's where the hardware limits come in. Besides limits on the screens and hard drives, to be eligible, the systems can have no more than 1G byte of RAM and a single-core processor running at no more than 1GHz. The program makes an allowance for some chips, including Via Technologies' C7-M processors, which run between 1.0GHz and 1.6GHz, and Intel's upcoming Atom N270.

By offering Windows XP Home Edition at bargain prices, Microsoft hopes to secure its place in the ULPC market and reduce the use of Linux, according to an official at one PC maker, who asked not to be identified because he was not authorized to discuss the program.

"[Low-cost PC makers] have made some good inroads with open-source, and Microsoft wants to put a stop to it," the official said.

The official did not seem opposed to the program. It should stimulate more competition between Windows and Linux in the ULPC market, and it could invigorate sales because consumers who want an easy-to-use PC are likely to prefer Windows, the official said.

Microsoft has said it plans to stop selling new Windows XP licenses after June 30, but it has made exceptions, including for the use of XP Home in ULPCs.