The concept of virtualization has existed in one form or another in computing since the early 1960s. In virtualization, the characteristics of a resource are abstracted, so that it may be accessed in some way that is different from its actual physical form.
One example of this is virtual memory: a computer may take advantage of disk storage as an extension area to swap or page the memory of running processes, so there appears to be more memory on a system than actually exists.
Another use is virtual LANs, or VLANs, where a collection of systems that may or may not be on the same network can be addressed as if they, and only they, are on a single network; this adds security and simplifies network administration.
Most often, however, virtualization is used specifically to refer to system virtualization (also known as "virtual machines").
System virtualization (often "server virtualization" or "desktop virtualization," depending on the role of the virtualized system) is the ability to present the resources of a single computer as if it is a collection of separate computers ("virtual machines"), each with its own virtual CPUs, network interfaces, storage, and operating system.
Virtual machine technology was first implemented on mainframes in the 1960s to allow the expensive systems to be partitioned into separate domains and used more efficiently by more users and applications. As standard PC servers became more powerful in the past decade, virtualization has been brought to the x86 architecture to provide the same benefits.
Virtual machines appear both to the user within the system and the world outside as separate computers, each with its own network identity, user authorization and authentication capabilities, operating system version and configuration, applications, and data.
The hardware presented is consistent across all virtual machines: while the number or size of them may differ, abstract devices (either artificially optimal virtual devices or emulations of specific physical devices) are used that allow virtual machines to be portable, independent of the actual hardware type on the underlying systems.