Microsoft's position on this is interesting, since I'm fairly sure they were at first interested in providing software. This and the UMPC suggests that Microsoft may actually be in trouble, well "innovation challenged". After all in a world where computers are now not just getting cheaper, and faster, but also getting smaller it's no big deal to imagine a smaller version of a standard PC. But how well is Microsoft doing in all the other things that are now just very small computers, TVs, DVD players, phones, wireless routers...?
I've been reading Zwick's book on "designing for small screens", and XP is certainly not where I'd want to start in designing apps for physically smaller computers, even if they do have very high res screens. http://www.avabooks.com.sg/avauk/details.php?id=107