Xen lets you create guest operating systems, so called "virtual machines" or domUs, under a host operating system (dom0). Using Xen you can separate your applications into different virtual machines that are totally independent from each other (e.g. a virtual machine for a mail server, a virtual machine for a high-traffic web site, another virtual machine that serves your customers' web sites, a virtual machine for DNS, etc.), but still use the same hardware.
This HowTo uses Debain Sarge for both the host OS (dom0) and the guest OS (domU). In an additional section at the end it will also show how to create a virtual local network with virtual machines, with dom0 being the router.