Let me take a stab at trying to explain the thinking behind this. It's a pretty damn cool idea if you ask me (disclosure: I do work for VMware)
A virtual appliance is a virtual machine that is configured to act like an appliance.
First, check out
http://suif.stanford.edu/collective/ which talks about some of the research around this concept.
The gist of this idea at least in my view is that you can design more powerful, more manageable and more usable software when you can control the entire software stack, including OS and all applications running on it. TiVo is a cannonical example of this. It's based on Linux, updates and manages itself, and the good folks at TiVo can get the benefits of Linux without having to write software that has to support 7 distributions and 15 kernel patches. Of course TiVo is a physical entity, which has its advantages (easy to plug into your cable box, comes with a remote control), but also has its disadvantages (cost of hardware, can't download a TiVo over the internet).
So the idea then is to marry the benefits of hardware appliance with software. I personally think it gets even more interesting when you start to look into the realm of server virtual appliances. Wouldn't it be nice to just go to a website and download a fully configured, self-managing mail server/web server/file server/network security box/proxy server/vpn server etc. etc? No configuration hassles, if done right it can manage itself. Its also a pretty amazingly useful way to bring the benefits of Linux and open source to the masses IMO. If Linux can be installed just like an application, and have a very low maintenance burden, it seems like that might really help continue to accelerate its adoption.
Anyhow, hope this helps explain what a "virtual appliance" is supposed to be all about.
