Well, let's start with the basics. Your computer is powered by a CPU, usually made by Intel or AMD. They use what is called the x86 instruction set. Your operating system has to communicate with the CPU to do its work. You can't just send general instructions to any CPU, you have to speak its native language.
The problem is x86 based CPUs are horribly inefficient. They suck power like crazy, and for speed, they were supplanted by PowerPC chips (made by IBM and, until a few years ago, the CPU of choice for Apple) and ARM chips. ARM CPU's are tight. Really tight. Used primarily in cell phones and Pocket PC's, ARM's are a marvel of engineering. They have built netbooks using the architecture and running Linux that can go 24 hours on a single charge. x86's, by way of contrast, can only go about eight hours on an equivalent battery, and that's with some fancy tricks at the hardware level that no one really implements.
As mentioned, ARM's are chiefly used in embedded devices. M$ entered into a licensing agreement with ARM back in 1997. The result was Windows Custom Edition, or as we snarkers like to refer to it, WinCE. Windows proper was engineered with the x86 instruction set. It cannot run on an ARM. Period. Finito. The end. So they made a watered down version and went with that. Ironically, because it wasn't truly Windows, it couldn't do some of the same things like run certain scripts or access .NET or other things. In other words, it was nearly unexploitable by crackers. IIRC, approximately two viruses that work on WinCE exist in the wild, and they are very limited in what they can do, mostly screwing with the user, not stealing information.
ARM has seen its market grow with the cell phone market. Other than netbooks, no one is really trying to fully exploit the ARM architecture. Even Apple. Apple's iPad runs something similar to the ARM (it was designed by the same guy), but not quite. It's sort of a custom remix.
Meanwhile, M$ has seen the mobile market explode. M$ long thought there was nothing to be gained there (from a company that once said 640K should be enough for anybody), and between Apple and Linux, is lagging behind. Last year, word got out about Project Pink, an attempt to make an iPhone killer by merging a cell phone with the Zune. Even after the mess with Damage and the T-Mobile Sidekick/Hiptop debacle, they quietly killed the project. M$ has at least been curious about the ARM. After killing Asus' Snapdragon project which would have put Android on a netbook, M$ has tried forcing the market back to using Windows. They actually see the writing on the wall -- there are well-founded rumors that M$ was looking at an ARM version of Vista. It was called Project Menlo, and was to try and replace the kernel behind WinCE with an NT kernel that would make running Fista on an ARM a reality. But between how laggy and buggy Fista was and having to build the OS from scratch because of the ARM, it never materialized.
Netbook sales are starting to fall. People wanted their mobile computers, they got them, and sales are leveling off, keeping in line with other computers now. And as regular PC sales are flattening, that's leaving companies scrambling for money. M$ was hoping Mobile 7 for cell phones would help. But Mobile 7 took so long to get to market (and after the buggy experience of WinCE 6.5), everyone is either running Linux, their own OS, or Linux/Android (not counting iPhones, of course). Now, the iPad is happening.
Why is the iPad selling? Because it's Apple. I don't say this with bitterness, it's a statement of fact. See, as soon as the iPad started selling like crazy, everyone wanted to make a tablet. Hey, Linux has been engineered to run on tablets and has been running on ARM's almost since the day they came out! But there has not only been no Linux tablets, but planned ones from big companies like HP have been quietly killed. People do not want a tablet, they want an iPad. Plain and simple.
That's not stopping M$, though. There were rumors of a new tablet PC/Zune hybrid going around. Now, the architecture license. This gives M$ access to all information about the ARM so they can build their own devices with it.
What for? Well, el Reg, M$' newest lapdog, is speculating that it's so they can use it in the XBox. If you really believe that, I have a bridge to sell you. They want to make a tablet, and they are hoping to use the ARM to do that. iPad's are still pricey, so the market is clearly willing to pay it. The ARM will let the units be built cheap while M$ can still tack on the outrageous OEM lincense for Windows and the price will remain relatively the same, a harsh lesson they've learned by setting the prices in the netbook market (people want cheap computers, not to pay for an OS they don't want, goddammit!). I doubt it's to make Mobile 7 run better, because it's still not full blown Windows and they can extort users or mine data with it the way they can their regular OSes.
So, what will come of this? I'm guessing nothing. The project will be beyond the capabilities of M$' engineering staff. Remember, it's the reason they bought Damage instead of their own staff finishing Project Pink. M$ will instead insist on a tablet powered by an x86 (by Intel, of course, their partners in the whole thing, AMD and VIA will never see it), and between power draw and people unable to use their XP downgrades because XP won't run on a tablet, will wonder why it's not selling.