If you have never heard of IDN domain names, you likely soon
will. This is because the most used and popular internet browser
in the world, Internet Explorer (IE7), will soon beging to
resolve them by default. This means people from all over the
world will finally be able to communicate websites, domain names
and urls in their native languages. Many people feel this will
mark a turning point in internet history. But just what is IDN
and why are they so important?

IDNs are domain names that are written in foreign languages like
Chinese, Japanese or Russian. IDN stands for Internationalized
Domain Name. Most domain names that people are familiar with are
written using the latin/english 26 character alphabet (or
numbers), in an encoding called ASCII. This is because the
internet was designed from the beginning to work using ASCII.
IDN allows for the use of non ASCII characters in domain names.

IDN presently acheives this by using what is known as unicode, a
foreign language encoding, to display the foreign language
domain. The IDN can be converted by the browser via a number of
algorithms to what is known as punycode, which is an ASCII
version of the IDN, which can easily resolve with the current
internet system. Punycode domains can be identified by their
“xn--” beginning. The web browser performs the conversions and
resolves the domain name into the correct unicode language.

Up until now, only a few browsers could/would convert IDNs.
There have also been issues with IDNs regarding security and
what is known as IDN spoofing and homograph attacks, where
similar looking characters could be used to create look alike
domain names. But with IE7 on board, and developing security
refinements, the world moves closer to global IDN resolution.
With IDN, people all over the world will be able to type domain
names in their languages and visit sites that may be there.
Businesses will be able to advertise their sites in the correct
language. The internet will realize its promise as a truly
global, international and diverse medium.

http://www.reviewimo.com/2008/04/01/idn-domain-names-are-coming