A virtual machine is a software computer that, like a physical computer, runs an operating system and applications.
A virtual machine typically contains a display, a hard disk or disks, one or more processors, memory, a CD/DVD drive, a network adapter, and a USB controller. All of these components are virtualized. That is, these elements of a virtual machine are all created by software and stored in files on your Mac.
The virtual machine runs in a window on your Intel-based Mac. You install an operating system and applications in the virtual machine and operate it as you would a physical computer. An operating system cannot distinguish between a virtual machine and a physical machine, nor can applications or other computers on a network. What you can do with a physical machine (install software, save files, add additional drives, and so on) you can do with a virtual machine.
Virtual machines are fully supported by Fusion with the underlying physical hardware. For example, you can configure a virtual machine with virtual components that are completely different from the physical components that are present on the underlying hardware. Virtual machines on the same physical host can run different kinds of operating systems (Windows, Linux, Mac OS X, and others).