Some technologies are cut, others just get renamed so many times that people think they've been cut!
Ever since the first public unveiling of Windows Presentation Foundation, we've supported both standalone and browser-based applications. On the browser side, applications run in a partial-trust sandbox that allows a subset of WPF functionality to be supported securely. From Visual Studio, simply create a new project of type "WinFX Web Browser Application" (this presumes you've installed WinFX and the WinFX Extensions for Visual Studio) to create one of these projects.
In order to confuse as many people as possible, this technology has had myriad names over the last few public releases. In Beta 1, it was known as "Avalon Express", and the applications had a file extension of .xapp. However the Express name overlapped with our use of the word "express" to describe the lightweight versions of our developer tools, so in the PDC / September CTP release they were renamed to the simpler, more descriptive "Web Browser Application", with a .wba file extension. Time passes, and it turns out that the .wba extension is used by another product already, so to avoid application conflict, they were renamed again in the recent November CTP release to "XAML Browser Application", with a .xbap file extension. It's the third version of the name, so hopefully we've got it right this time.
Updated: I've enclosed some new samples here - the original ones I linked to are no longer compatible with more recent builds. Thanks to TheWPFBlog for these great samples that run on Windows Vista RC1.