<p>I've got an MDI application written in Delphi 2006 which runs XP with the default theme. </p>

<p>Is there a way of controlling the appearance of the MDI Children to avoid the large XP-style title bar on each window? </p>

<p>I've tried setting the <code>BorderStyle</code> of the <code>MDIChildren</code> to <code>bsSizeToolWin</code> but they are still rendered as normal Forms.</p>

I don't think there is; in my experience, MDI in Delphi is very strictly limited and controlled by its implementation in the VCL (and perhaps also by the Windows API?). For example, don't try hiding an MDI child (you'll get an exception if you try, and you'll have to jump through a couple of API hoops to work around that), or changing the way an MDI child's main menu is merged with the host form's.
Given these limitations, perhaps you should reconsider why you'd like to have special title bars in the first place? I guess there are also good reasons why this MDI stuff is standardized --- your users might appreciate it :)
(PS: nice to see a Delphi question around here!)