In order to understand Islam, it is helpful to appreciate the environment where it was birthed. Pre-Islamic Arabia was centered between two once-great empires in decline (Byzantine and Persian). It was "a land of traders and raiders" with no united religion. Various tribes worshiped various gods, influenced to some degree by the Semitic, Babylonian, Greek and even Christian beliefs introduced along the numerous trade routes which traversed the Arabian Peninsula.
Muhammad was born into this religiously diverse environment in 570 A.D. Not much is known of the prophet's early life, but it is generally acknowledged that he lived a somewhat impoverished early life. His contact with Judaism and Christianity in particular give context for a growing concern of the young man with concepts of divine judgment and punishment.
When 40 years old, Mohammad experienced what Islamic tradition calls "The Night of Power and Excellence." While in a cave near Mecca, an angel appeared to him and commanded him to "recite." But he was unsure what to recite. Following was the first of many revelations that would continue until his death two decades later. These recitations were eventually compiled in the Qur'an (or Koran), a word which means "recite." The revelation of the Qur'an marks the one miracle of Muhammad's ministry according to Islam.
Muhammad was so troubled by the vision that he rushed home thinking he was insane or that he had been visited by a jinn (a spirit in Arabic tradition from which we get the word genie). Comforted and assured by the counsel of his wife, Muhammad eventually became convinced that the revelation was divine. Islam had been born, and Muhammad had become its true and ultimate prophet and messenger.
Once Muhammad was assured of the authenticity and authority of his revelation, he began to proclaim publicly in the streets of Mecca. For a decade he preached with relatively few converts. Instead, the common response of the citizens was skepticism. While residents were not concerned with the vast majority of his revelations, his claim to the prophetic voice undermined Meccan tribal authority and was thus met with increasing persecution. The inhabitants of Mecca were not yet ready to recognize Muhammad's authority.
Meccan resistance eventually forced the prophet to flee. In 622 A.D. Muhammad migrated to Yathrid (later renamed Medina — "the city of the prophet"). This event, Muhammad's hijra (migration), marks year one of the Islamic calendar and the creation of the umma (the Islamic community).
In Medina, a theocracy was established with Muhammad as chief arbitrator. Islam began to form and flourish as various cultic practices were established including: weekly services on Friday, prostration during prayer, calls to prayer from the roof of the mosque, and the regular collecting of alms. Sharia, the way of life, began to emerge, and Islam transitioned from a religion with social and political implications to a true state religion.
Following this period of development was a time of contest as Mecca and Medina became engaged in a series of battles and raids. The struggle culminated with Muhammad marching on Mecca in 630, severing its trade lines. With Mecca under his rule, he quickly began a campaign to unify adjacent tribes under his leadership. Opponents had three options: convert to Islam, submit to Islamic authority and pay tribute, or die by the sword.
Just two years after taking Mecca, Muhammad developed a fever. His subsequent death was unexpected, and the umma was shaken. The loss of the messenger signaled the beginning of division in Islam regarding the succession of leadership (caliphate or imamate) — a schism eventually resulting in the modern distinction between Sunnis and Shi'ites.
In spite of the division, Muhammad's death also marked a period of rapid Islamic expansion as the somewhat consolidated tribes leveraged the weaknesses of the declining Byzantine and Persian empires. Within a century of the prophet's death, Islam had evolved into an empire.