Welcome to User Mode Linux. It's going to be fun.
Normally, the Linux Kernel talks straight to your hardware (video card, keyboard, hard drives, etc), and any programs which run ask the kernel to operate the hardware, like so:
+-----------+-----------+----+
| Process 1 | Process 2 | ...|
+-----------+-----------+----+
| Linux Kernel |
+----------------------------+
| Hardware |
+----------------------------+
The User Mode Linux Kernel is different; instead of talking to the hardware, it talks to a `real' Linux kernel (called the `host kernel' from now on), like any other program. Programs can then run inside User-Mode Linux as if they were running under a normal kernel, like so:
+----------------+
| Process 2 | ...|
+-----------+----------------+
| Process 1 | User-Mode Linux|
+----------------------------+
| Linux Kernel |
+----------------------------+
| Hardware |
+----------------------------+