The word virtuality derives from the Latin virtus, which means strength; this is in turn derived from vir, indicating a man or manliness, as in virility.  It is also related to virtue, which indicates both "a particular moral excellence" and "superiority or excellence in respect either of nature or of operation."
The Oxford English Dictionary lists three possible definitions for virtuality. The first of these is archaic, and means "the possession of force or power" or "something endowed with virtue or power." The second possible definition is "essential nature of being, apart from external form or embodiment." The third possible definition, which also corresponds to the common usage of the word, is "a virtual (as opposed to an actual) thing, capacity, etc; a potentiality." Thus the two definitions of virtuality in use seem contradictory. C.S. Peirce, in his definition of the virtual, notes this contradiction and finds it problematic. He defines the virtual as follows: "A virtual X (where X is a common noun) is something, not an X, which has the efficiency (virtus) of an X."  His definition does not adhere to either of the OED definitions strictly, as it indicates an "external form or embodiment," which does not reference itself and which stands in for something else ("a virtual (as opposed to actual) thing"), but in such a way as to be as effective in terms of representation as the actual thing. Nevertheless, Peirce seems to indicate his definition is closer to the second rather than third OED definition, as he goes on to state that, "This [his above definition] is the proper meaning of the word; but it has been seriously confounded with 'potential,' which is almost its contrary. For the potential X is of the nature of X, but is without actual efficiency." For Peirce, the virtual relation indicates "a displacement."
Historically, virtuality as potentiality is founded in Aristotelean thought.  For Aristotle, entities can be understood as both actuality and potentiality; entities are actual in their existence in the world, but every mode of existence is an actualization of a potentiality. The virtual here indicates the multitude of possible states that any entity may experience, circumscribed by the essential - that is, the potential always relates to an essence in terms of the possible states that may occur (depending on the essence of the entity, some potentialities exist while others do not). For Peirce, the virtual marks a difference of orders, one standing in for the other. Classically, the virtual indicates the potentiality of an essence. Thomas Aquinas introduces virtuality into this context, as a synonym of Aristotelean potentiality. The move from the virtual as marker of potentiality in one order to marker of the potential between or among orders occurs in Kant's On the Form and Principles of the Sensible and the Intelligible Worlds. Kant, in attempting to understand the nature of the soul, answers the problem of the incorporate soul existing in the corporate world by designating the soul as having a "a presence in the world [that] is not spatial, but virtual."  Thus the virtual begins to mark that which exists in one order and can only be actualized in another order. Peirce marks the point where the virtual and the actual split, where the virtual is a relation rather than a potentiality that is waiting to be actualized (this is not completely true, of course, for Peirce requires a shared essence between entities of different orders, a quality or "virtus" that marks the differing "common nouns" as equivalent).
The modern, vernacular use of the term virtual corresponds to Peirce's definition if we think of the popularized, Lawnmower Man image of virtual reality, as here virtuality is of a different order than the actual world (as it can be fantastic, as in the aforementioned film), but it likewise must be loyal enough to a concept of reality that it retains recognizability (thus it functions as an illusion of an exterior reality). The modern, technology-driven conception of the virtual can be divided into two equally apt definitions.  The first connects the virtual with its "real" counterpart by means of a visual similarity made manifest technologically, via various apparatuses that construct interactive sensory experiences. The apparatus used in Lawnmower Man , for example, corresponds to the prevalent combination of prosthetics, usually a helmet display and a haptic interface of some type (such as a hand controller or glove). A second model, developed in the early 1990s, is the CAVE system, a virtual theater which uses an enclosed room, the walls of which are composed of display screens onto which high resolution virtual imagery is projected, creating a virtual space that is less obviously mediated by technology.  These technologies are aimed at providing an illusion of the human body in a virtual space, but virtual technology is also being employed to extend the manipulation of the human body in real space, as in the example of virtual surgery.  Virtuality of this first type, which presupposes visual similarity, does not necessarily imply highly specialized technology; virtual online persistent worlds, both game and information oriented, which utilize classical perspective, but substitute the computer screen for the helmet display, provide an example of the virtual as resemblance, as does the WYSIWYG interface, etc. The second conception of techno-virtuality can be summarized as informational, in which the virtual and the actual share not visual characteristics but a similar information structure. An example of this would be the online chat room, where the virtual room or community is structured by its ideal rhetorical underpinnings, the dialogue of different voices (here mediated by typed text). The virtual classroom or museum are further examples of this.
The farthest extension of the modern usage of virtuality is manifest in Baudrillard's notion of the collapse of the distinction between the real and the virtual. For Baudrillard, the enormous circulation of images that marks the last half of the 20th century (and is marked by television more than any other technology) introduces an ontological confusion in terms of the image that is not present even for Peirce; for Baudrillard, the virtual does not indicate a difference across orders, but indeed the complete collapse of orders, so that the real and the virtual become indistinguishable (on an ontological level).  For Baudrillard, images have lost their ability to be virtual because a real referent can no longer be distinguished - what once was designated as virtual is now more present than reality itself (or reality is so imbricated with these images that the difference becomes moot). Against virtuality, Baudrillard posits the hyper-real, (2).