What do you think of when you hear the words virtual reality (VR)? Do you imagine someone wearing a clunky helmet attached to a computer with a thick cable? Do visions of crudely rendered pterodactyls haunt you? Do you think of Neo and Morpheus traipsing about the Matrix? Or do you wince at the term, wishing it would just go away?
Opinions differ on what exactly constitutes a true VR experience, but in general it should include:
– Three-dimensional images that appear to be life-sized from the perspective of the user
– The ability to track a user’s motions, particula­rly his head and eye movements, and correspondingly adjust the images on the user’s display to reflect the change in perspective.

Virtual reality is the term used to describe a three-dimensional, computer generated environment which can be explored and interacted with by a person. That person becomes part of this virtual world or is immersed within this environment and whilst there, is able to manipulate objects or perform a series of actions.

Here is a more detailed video about Virtual Reality and How does it work, madde by the guys from Mashable

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