Here is the page on the OLPC website that documents secure digital cards on the XO.
The XO supports SDHC (high capacity). I use a 16GB AData card on my XO without problem.
Here is a little reminder: when you insert the SD card into the XO, do so with the screen, and the shiny part of the card, both facing you.
BTW: I use a “Sandisk MicroMate for SDHC” USB adapter to work with the card under Windows XP, it cost 8USD from an Amazon affiliate.