Virus scanners work in several ways. The most common is pattern matching, where the scanner looks inside files for a string of bytes which match those in its database of known viruses. This will find the majority of viruses.
For more information on this topic, visit these other searchSecurity resources:
Best Web Links: Malware
David Strom's Security Tool Shed: myCIO.com Virus Scan ASAP
Scheier's Security Product Roundup: Antivirus tools: Unify and conquer
Dig Deeper on Penetration testing, ethical hacking and vulnerability assessments
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