Eucalyptus is an open source Infrastructure as a Service cloud offering. What is unique about Eucalyptus is that it is compatible with Amazon AWS APIs.
Eucalyptus leverages operating system virtualization, such as KVM or XEN, to achieve isolation between applications and stacks. Operating system virtualization dedicates CPU and RAM to systems and applications such that they don’t interfere with each other. In cloud parlance, this is called isolation and is essential to achieve multi-tenancy. (For a refresher on basic cloud terminology, see here; for a refresher on Infrastructure as a Service, see here).
Cloud computing layers on top of operating system virtualization and when combined with dynamic allocation of IP addresses, storage and firewall rules creates a service that end users interact with to run instances of images