Woz was amazed that it was possible to have overlapping windows on such a resource constrained machine. But if Xerox engineers could do it, he could to dammit! After a Herculean effort he got the overlapping windows to work nicely and they shipped.
It was only later that they found out that Xerox's engineers were blown away by Woz's achievement as they had studied the problem and decided that it wouldn't be possible to do overlapping windows. They never developed that functionality.
Turns out that Jobs had made a mistake in remembering what he had seen and Xerox never did have those overlapping windows :-)
Anyway, this story might be incorrect on some points or a complete fabrication, but I like it.