What we (currently) use virtualization for
I've pulled this out of Random's comment on yesterday's entry:
[...] but I stop short of doing everything on virtual machines, which I think you do more of.
Although I may have accidentally left people with a different impression, right now we're actually not using virtualization for very much. We have one virtualization host machine, and on it we currently run only three virtual machines: two Windows images and a small Linux machine that forwards some low-priority email.
The Windows machines are Terminal Services servers; they exist because we have a departmental mandate to provide general access to Windows and the Office suite, so that (for example) non-Windows people have some way of reading Powerpoint presentations. Virtualizing our Windows servers has huge management advantages, especially that we will never have to worry about hardware upgrades (including via hardware failure). We also get some ability to reliably roll the state of the system back if something goes catastrophically wrong, which is reassuring.
(We have two Windows machines because we need to provide access to both Office 2003 and Office 2007.)
The small Linux machine is virtualized because we couldn't be bothered to find and deploy some physical hardware for it (not 'wasting' hardware on such a small machine was less of a consideration than you might think).
I would kind of like to use virtualization for more than just this, but in our environment it's hard to find small unimportant services to virtualize. Our machines tend to be either big, important, or both. Big matters because virtualization, especially cheap virtualization, currently costs you performance and capability. Importance matters because when a service is important, you wind up wanting fault isolation for it, fault isolation that our virtualization environment does not give us.
(Thus, for example, we run two local caching DNS servers for our local users, each on dedicated hardware, despite modern DNS servers not exactly requiring big machines.)