The XO laptops are being trialled worldwide

It has not committed to offering XP on the XO laptop but hopes to release the operating system in the first half of 2008 if the trials succeed.

The work, undertaken as part of the firm's plans to widen access to technology, forms part of a project to run Windows on flash-based machines.

The XO does not have a hard drive, and uses a lightweight flash drive instead.

Microsoft's James Utzschneider, writing on his blog, said: "We are hard at work on the project here.

"Between Microsoft employees and third party contractors that we have brought into the effort, we have over 40 engineers working full-time on the port."

The XO is the work of the One Laptop Per Child project to boost access to technology in the developing world by building a low-cost laptop designed for educational uses.

It has been pioneered by a not-for-profit group led by Nicholas Negroponte, the founder of the Massachusetts Institute of Technology's Media Lab.

The group has taken its first orders, with 10,000 bought by Uruguay and 40,000 by Peru, with an option for a further 210,000.

The availability of Windows on the XO could boost take-up of the machine. There have been reports that some countries have been cautious about signing-up to the project because it does not run Windows, the world's most popular operating system.

The XO laptop runs Linux, an open source operating system which costs nothing for schools around the world to use.

If schools and governments wanted to use XP on an XO machine, they would have to buy a license.

For Microsoft the challenge in porting XP to the XO machine has been in re-writing many drivers for the operating system that control functions like the laptop's webcam and wireless connections.

The engineers have also had to work to fit the operating system into a much smaller amount of storage.

Microsoft asked the XO project to add a slot for an internal SD memory card to boost the storage to 2GB in order to run XP. The complication for Microsoft is that the XO has a custom SD interface, rather than a standard one used by most computers.

"The potential payoff for students and schools from this work, of course, is that the tens of thousands of existing educational applications written for Windows can potentially run on the XO," said Mr Utzschneider.

Microsoft is currently looking into the process of installing XP onto the machines at the point they are manufactured in the factory and remotely, if needed.

Mr Utzschneider added: "Microsoft plans to publish some formal design guidelines early next year that will help Flash PC manufacturers benefit from our early work so they can design machines that enable a great Windows experience at as low a cost as possible."