I was cruising though an iscsi mailing list when I discovered this post.
Moka5 seems to be building some very similar to what I visualised in my post about Virtual Appliances. The are building what they call LivePCs for the deployment of software running on VMWare based VPUs. One of the cool bits of tech they have is the ability to boot a system before it has completed streaming to your VPU:
This player loads optimized virtual machines on-demand, and allows the VM to be executed before the entire image is downloaded. For example, a 1.3GB VM can boot up to the desktop after downloading just 60 MB (1/20th the amount of data). This took 10 minutes over a cable modem, instead of 200 minutes.