VRML stands for Virtual Reality Modeling Language. The "Virtual Reality" in VRML has to do with the metaphor which it pursues: human space. That space is 3-dimensional and defines the ways we move, percieve and communicate. Thus, VRML includes many of the things that go into making a world: a way of describing geometry which creates objects and spaces you can move and move around in, as well as light, texture and sound which you can approach and view from whatever angle. It's also from this "worldly" imitation that VRML files get their name: you call them "worlds" and their file ending is ".wrl" The second part, "Modeling Language", is about the process of making VRML. While much of VRML is composed and tweaked in the text, So, VRML authors use modeling programs which are designed to create 3D geometry in a graphical format. The models are then translated to VRML and viewed in a VRML Browser. Browsers render the VRML turning it into percievable space which you can navigate through and interact with. So if you've downloaded a VRML file, the interaction you have with it is because your machine is rendering the space on the fly. It's not some movie streaming off your Internet connection.
What is VRML 1.0?
VRML 1.0 is the first generation of VRML. It describes the foundations of a networked world: geometry, lighting, color, texture and linking. In VRML, the geometry can be linked to the net as well as to other VRML worlds. This is along the lines of the idea of "cyberspace", an important part of VRML philosophy. VRML 1.0 has special capabilities like Inlining and LOD's (Level of Detail) which allow you to optimize your world for limited bandwidth and processing power. In additon, the VRML 1.0 Specification is a ripe nine months old and is a stable language which has full browser support.
What is VRML 2.0?
VRML 2.0 is the current generation of VRML. It fills out the "world
metaphor" more fully, with a richer level of interactivity. Animation,
spatial sound, collision detection and scripting are supported in addition
to all the VRML 1.0 features.