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I have heard about that they are somewhat related to XML (not sure though). I heard that a web serivce resides on the server-side with a certain function. When the client (webpage) calls the function, it returns a certain result to the client. That's it? Can't you just do this with simple PHP, ASP, or any other server-side programming language? If not then really what is a web service and what is the main purpose of it?
Basically, a Web Service is a fancy term for a server side script that returns XML instead of HTML that is then interpretted through client side script on another webpage. Like you said, you can do the same thing now, but Microsoft wanted to make it sound cooler, so they gave it a fancy name in .NET.
Also, they made it easier to integrate a Web Service by writing most of the javascript code for you when you just drag the service into your webpage. (I'm a little fuzzy on it, since I haven't had much time to investigate .NET. You might want to ask in one of those forums.)