A virtual floppy disk is an alternative to the traditional floppy that exists as a file rather than physical media. A virtual floppy is mounted to the same drive letter (A:) and accessed in the same way but is actually a disk image stored as a file on the hard drive.
Virtual floppy disks are used for a number of reasons. Although many manufacturers are no longer including floppy drives on computers and fewer retailers are selling floppy disks, some software installation processes still require their use. Other uses include partitioning a hard drive, accessing the command line prompt and transfering files between virtual machines. Some people prefer to use virtual floppies simply because they are easier to manage - there is no physical media to get damaged or lost.
A virtual floppy disk can be created by copying a physical disk to an image file.
There are also a number of programs, such as Diskcopy, Virtual Floppy Drive (VFD) and Floppy Image Creator, that can create a virtual floppy in the absence of a physical disk (or, possibly, the absence of a computer with a floppy disk drive).
Source: http://whatis.techtarget.com
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