A Virtual Private Server (VPS) is a simulation of hardware by a host operating system that allows another operating system to run on it. What that means for Web developers is that a Web hosting company can host multiple "Virtual" servers on one physical, or "host", server.
Each virtual server is isolated from the others (or "Private"), and access to hardware resources (RAM, CPU, Disk Space, Network throughput) is managed by the "host" server. So, for instance, a server may have 2GB RAM, 100GB of disk space, and 2 x 2GHz processors, with 10 VPSes on it. Depending on the VPS software that's used on the host machine, each VPS can either share hardware resources, or have guaranteed access to 200MB RAM, a disk space limit of 10GB, and an effective CPU of 400Mhz. Now, this is a slight oversimplification, but it gives you an idea of a potential VPS scenario.
Most VPS plans are hosted on either Linux or FreeBSD, but they do also exist in the Windows world. My personal experience and preference is for the *nix side of things, and from my own research, I've found the costs of Windows VPS plans tend to be significantly more expensive than their *nix counterparts, but that's not to say they're not suitable in specific situations.
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