A virtual server (or machine in fact) is an instance of the operating system running as a separate machine on the same box as other virtual (or non-virtual) machines, rather like the Java vm.
For instance on my work machine which runs Windows XP I have 2 additional virtual machines which I use to run various different compilers in. These vms also run Windows XP so when I start them it looks like Windows XP running.
The advantage of doing this is that it isolates the running software from other vms running on the same box so if there is a problem with 1 it does not effect all the other vms.
On a server this can be useful because proper server hardware is very expensive, if you are just running some small server software you are unlike to use the full capacity of the hardware. By virtualising the machine so that it contains several vitual machines you can the run several different servers.
Again my work does this for project source control servers, so there is 1 physical machine but every project has it's own source control server. However all these servers just run as virtual servers on the 1 physical machine.
Virtualisation is the process of implementing several virtual servers on a single physical machine.
You can find out more at
http://www.vmware.com/, VMWare is the virtualisation software we use at work.
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