MS announced this work earlier in the year.

@Vasek -- This link might give you a bit more info:

http://channel9.msdn.com/posts/Charles/Mark-Light-and-Bohdan-Raciborski-Windows-XP-on-Flash-Based-Ultra-Low-Cost-PCs/

Windows XP is not resource hungry on it's own. It only needs 128mb to boot to a desktop. Remember it's a 2001-era OS that is being used on 2008 hardware. If you have a four core, 4gb, SATA 2.0 machine XP is fast in away no OS has ever been in my 25 years. It's all the additional crap you need to do anything with it that is the problem. Bloated 3rd party drivers *points at random gpu vendor*, redundant services. Also a metric crapload of drivers and language packs that you don't need nor likely will never use. Nevermind Windows decides to load most of this junk and most of its registry (regardless of how bloated the registry becomes) thus slowing down your machine after a few months.
If you use a slipstreaming tool like nlite to put Windows XP on a diet you take the resulting CD image from about 600mb down to 300mb or even less. I've installed Windows XP on a 1gb compact flash card and that was with 256mb page file and room enough for firefox and a few lightweight apps.
The fact MS has managed to do this on the XO is no great feat at all. They have perhaps pretended to put effort into something that would be trivial anyway. I hope they've taken a look at the code to boost performance on a slow processor. It'd be interesting to extract a OS image and try to put back all the drivers and services needed on a desktop rig - performance boost anyone?

I can guess it is some kind of XPe which is widely adjustable for the different HW configurations. XPe is very good solution for the closed boxes.

There's this thingy called XP Embedded that's been available for years now. You mighta heard of it.

My XO is hiding under the bed whimpering. What can I say to reassure it?

Windows is still out there? Golly, I thought Microsoft died after they released Vista...

I just pity the poor unfortunate people who end up receiving these Windows-based XOs...

Does anybody know of a place on the net, where a solid advice what all could be nLited (or whatever) from XP to make it this efficient?

Tried it myself, but w/o being aggressive, the results weren't nearly as impressive. And when I tried to be more aggressive, it would no longer install.

You say: "One has to question though if Microsoft can get its Windows XP product working well on such a low spec, why it is such a resource hungry OS the rest of the time"

Don't you get it? In exchange for having hardware manufacturers loading Windows by default on their machines, the price Microsoft has had to pay is to make it so bloated that people can't use it on their old machines and would have to change to newer, faster hardware. The same thing has happened again with Vista, the only reason it is such a performance hog was to make people buy all new stuff. Jeez, I thought that was obvious!

Thanks to Linux, people know it was all a SCAM... Windows 7 might be what Vista could have been. We'll just have to wait and see. 

I know that thanks to Linux and the eee, the tech landscape has changed dramatically, and for the better.