Turns out this is really happening, and I'm thrilled. In "Why 'Private Cloud' Computing Is Real -- And Worth Considering," InformationWeek reported that this isn't your father's Oldsmobile... it's real and it's different:
...The Department of Veterans Affairs has deployed a small internal cloud. It wanted an early-warning system that could analyze data from its 100-plus clinics and hospitals and spot outbreaks of infectious diseases, and it had to do so on a tight budget. The project, dubbed the Health Associated Infection and Influenza Surveillance System, was built on six standard blade servers with converged network and storage I/O. The CPUs can be managed individually or as a virtualized whole, with workloads shifted and capacity summoned as necessary.
The system runs Egenera's cloud management software, PAN Manager, which manages I/O, networking, and storage for the servers as a logical set. It can execute several applications, while always having enough horsepower to do its main job. The system's Dell blades and storage can be virtualized as a pooled resource in such a way that processing power can be devoted quickly to the VA's cloud, its highest-priority task. In many ways, the VA's new system anticipated Cisco's recently introduced "unified computing" platform, a virtualized, multiblade server chassis with converged I/O that Cisco touts as just the thing for cloud computing.
I've spoken with the VA's CIO; they're running both physical and virtual applications (i.e. physical Oracle and virtualized services) but want to be able to scale transparently, with extremely high levels of availability, etc. Plus, like many IT Operations, they have trouble anticipating end-user demand -- so they require instant "elasticity" in the system. Hence, the "cloud" model for IT operations fits the bill. While they don't call it that ("cloud" seems to be the sexy term right now) it's how they're operating.
My suspicion/hope is that as this simplified model for internal IT matures, more IT operations folks will see the light (through the clouds).