I remember of seeing an awesome demo of Application Virtualization when I visited the conference at US in last august. I saw having all office versions running on a machine without installing any of them (with the help of Application Virtualization)
Basically, Microsoft acquired a company named SoftGrid, with the help of its product offering, MS has built on this technology.
I just found a very cool demo of "How it works" here,
http://www.microsoft.com/systemcenter/softgrid/evaluation/guidedtour.mspx
Want to see it in action? Wait for Microsoft Desktop Optimization Pack (MDOP)
Stay tuned.. 