Even though Microsoft planned to be a part of the OLPC project by making a release of XP specifically for it, they seem to be facing some troubles. Even though they would just love to force Linux out of that particular market, the going isn't easy, from space constraints to technical issues.
For their inclusion of Office, for instance, they claim will need 2GB along with Windows, which the XO laptop does not have. In order to work around this, they are creating a custom BIOS that will allow the machine to boot from an SD card.
This seems very strange, considering Microsoft is already a big player in the mobile market. Many PDAs run Windows Mobile, which they have managed to squeeze a plethora of apps onto with extremely limited hardware. Likely they are trying to be much more grandiose than a simple tool, however, and are more looking to make it an actual desktop-like experience. Clearly, they are not yet ready to go which is likely going to curb any attempts to get XP on the XO for a while.