'Ivan Sutherland established the theoretical foundations of virtual reality in 1965, describing what in his opinion would be the ultimate display:
"The ultimate display would, of course be a room within which the computer can control the existence of matter. A chair displayed in such a room would be good enough to sit in. Handcuffs displayed in such a room would be confining, and a bullet displayed in such a room would be fatal. With the appropriate programming, such a display could literally be the Wonderland into which Alice walked." 
In 1962 Morton Heilig created the 'Sensorama', which was a simulator that had wide-angle stereoscopic visuals, sound, vibration and smell. It was the earliest example of immersive, multi-sensory technology and could also be argued that it was the first prototype of virtual reality.
A year after Sutherland described in his opinion what would be the ultimate display he invented the head-mounted display (HMD) which was worn on the head or as part as a helmet. This was the first implementation of augmented reality but at the time was not available to the mass market.
Users were first able to interact with virtual objects in 1975 after Myron Krueger created 'Videoplace' an Artificial Reality laboratory. His idea was to create an Artificial Reality that surrounded the users and responded to their stimuli using projectors, video cameras and special purpose hardware instead of using the (by now) conventional use of goggles and gloves. Users didn‚Äôt have to be in the same room to interact as movements of the users were captured and analyzed before then being transferred into silhouette representations displayed in the Artificial Reality environment. The users had a sense of presence while interacting with onscreen (virtual) objects and other users even thought there was no direct tactile feedback in the lab.
The phrase Virtual Reality was later coined and popularised by Jaron Lanier in the early 1980s. This led Lanier to create the first commercial business around virtual worlds and then in 1989 he founded VPL Research, the first company in the world to sell VR products.
Finally in 1992 while working at Boeing helping workers assemble cables into aircraft  Tom Caudell coined the phrase Augmented Reality and opened up a new avenue for businesses to go down.
That same year L.B.Rosenberg developed one of the first functioning AR systems called 'VIRTUAL FIXTURES' at the U.S. Air Force Armstrong Labs. This Augmented Reality system overlaid information onto a workspace and demonstrated the benefit on human performance and efficiency.
As more and more interest around Augmented Reality is gathered Steven Feiner, Blair MacIntyre and Doree Seligmann present the first major paper on an AR system prototype named KARMA, at the Graphics Interface conference.
Seven years later in 1999 Hirokazu Kato develops ARToolKit at the HITLab and it is demonstrated at SIGGRAPH (Special Interest Group on GRAPHics and Interactive Techniques) that year. This tool kit opens up Augmented Reality to the masses as anyone could (and still can) download it and create their own applications.
Today ARToolKit is used by over 300 researchers worldwide for a very diverse set of projects.
In the year of the millennium the first outdoor Augmented Reality game, ARQuake, (AR version of the popular game Quake by idSoftware), was developed by Bruce H. Thomas. The game was later demonstrated in the International Symposium on wearable Computers.
AR Quake was a first-person shooter that allows the user to run around in the real world whilst playing a game in the computer-generated world. The system uses GPS, a hybrid magnetic and inertial orientation sensor, a custom-made gun controller, and a standard laptop carried on a backpack.
More recently with the abundant Smartphone's now available to the mass consumer market Wikitude AR Travel Guide was launched on 20 October 2008 with the G1 Android phone.
Wikitude is a mobile travel guide based on Wikipedia and Panoramio. Search landmarks in your surroundings and view them on a map, list, and on Augmented Reality (AR) camera view: What you see is an annotated landscape, mountain names, landmark descriptions, and interesting stories.
Last year in 2009 the AR ToolKit was ported to Adobe Flash (FLARToolkit) by Sagoosha. This enabled AR applications to be run on your average web browsers.
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Rheingold, H. (1992). Virtual Reality, Simon & Schuster, New York, N.Y.
Ronald T.Azuma. 1997. In Presence: Teleoperators and Virtual Environments. [Online] 6,4. 355-385.
Available at: http://www.cs.unc.edu/~azuma/ARpresence.pdf [Accessed 12 January 2010].
Augmented Reality. 2009. [Online] (Updated September 2009)
Available at: http://en.wikipedia.org/wiki/Augmented_reality [Accessed 11 January 2010].
Head-mounted display. 2010. [Online] (Updated 8 January 2010)
Available at: http://en.wikipedia.org/wiki/Head-mounted_display [Accessed 13 January 2010].
Videoplace. 2008. [Online] (Updated 22 August 2008)
Available at: http://en.wikipedia.org/wiki/Videoplace [Accessed 13 January 2010].
Jaron Lanier. 2010. [Online] (Updated 17 January 2010)
Available at: http://en.wikipedia.org/wiki/Jaron_Lanier [Accessed 13 January 2010].
Virtual fixture. 2009. [Online] (Updated 4 October 2009)
Available at: http://en.wikipedia.org/wiki/Virtual_fixture [Accessed 13 January 2010].
ARToolKit Projects. [Online]
Available at: http://www.hitl.washington.edu/artoolkit/projects/ [Accessed 13 January 2010].
ARQuake. 2009. [Online] (Updated 16 October 2009)
Available at: http://en.wikipedia.org/wiki/ARQuake [Accessed 18 January 2010].
Wikitude AR Travel Guide (Part 1) - Youtube. 2008. [Online] (Updated 19 October 2008)
Available at: [Accessed 18 January 2010].