[CRConrad]

> IBM did insist that the new version run all of the 1.x 16 bit stuff, but like DOS and Win 3.x mode this was done through some virtualization if memory serves.

Kind of, but IIRC it was a fundamentally different and more low-level kind of "virtualization": The 80386 processor's virtual[1] 8086 processor mode. Not much for them to do in the OS code itself, compared to writing a whole VM to run DOS apps on (he confidently says, never having written anything of the kind himself).

[1]: Probably not exactly the right word, but I can't recall the correct term right now.