A virtual machine is a tool which allows you to run multiple operating systems (or variations of a single one) at one time. Multiple CPUs and a good amount of RAM won't hurt either...
You can easily backup the whole machine as its just a collection of files and they also support disk "undo", you you can always reset to a "clean" state and rerun your tests over and over again as many times as required. For this reason they are actually better than (not just a substitution for ) real hardware!
Virtual machine vendors produce server and workstation products, you will want to download the workstation product (even to build servers).
|Microsoft Virtual PC 2004|
Microsofts' Virtual PC product is now free.
To me it is much slower than VmWare but you can't argue about the price.
VmWare is an excellent product (but is not free).