Having been at a large technology company, I have worked with massive VMWare infrastructure set ups. For internal applications it is not uncommon to also have production inside a VM at large companies. It really does save on development costs. Imagine shared dev boxes for functional teams working on a large projects. Instead of having to buy 6-8 servers, you can just get one beefy server and set up a VMs for each team. Not to mention this saves on energy, space, and other costs of maintaining physical infrastructure.

For most people the cost of an ESX server is far to great, especially for boutique development firms. The way I use VMWare WorkStation for small development is as follows:

1. Run Linux on VMWare on my desktop. I SSH in and use my dev tools on Windows to do all my work. It is also nice to be able to take snapshots at different points in case I mess things up with an install.
2. My VM image is portable, so if I need a subcontractor to work on something, I have the option to send him the VM image. This is really handy when I absolutely need a contractor to have the exact same distro and environment as me. I can also move the image onto a laptop quickly so when I have a client meeting, I can easily show them rough cuts of my work.

Of course for test and production, I usually host it on a single Virtual Private Server at a hosting company and have subversion set up to push out changes between the two.

You can download a free version of VMWare Server from the VMWare website.