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VPN creates a secure(highly encrypted in most cases) network connection from point a to point b, mostly over the Internet. This allows companies to reduce network cost for employees who travel alot, but can also be used for people who telecommute from home. Special Hardware/Software is required to do this.
The Hardware side of it can do most of the encrypting/decrypting.(Cisco VPN Concentrator or a slew of other vendors hardware.) It's made/programmed especially just for that. This also costs $$$$$'s. Some software solutions require use of the PC in some cases to do all the encrypting/decrypting.(Linux for example.)
Of course this usually requires other hardware to secure or lockdown your network. Firewalls, Routers, etc. You don't have to, but it's a very good idea, especially for businesses.
Thats just a very broad description. There is so much more to go into, but I won't bore or confuse you with that.
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