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At a basic level, a Linux Server consists of three building blocks: Hardware, Kernel and Applications. The Hardware usually depends on the provider or system maintainer, and, while it has big influence on the overall performance, it cannot be changed that easily, and will likely differ from one setup to another.
The main purpose of the Kernel is to build an abstraction layer on top of the hardware to allow processes (Applications) to work with and operate on resources (Data) without knowing the details of the underlying hardware. Ideally, those processes would be completely hardware agnostic, by being written in an interpreted language and therefore not requiring any hardware-specific knowledge.
Given that a system has enough resources to drive ten times the number of applications a single Linux server would usually require, why not put ten servers on that box, which will then share the available resources in an efficient manner?
Most server applications (e.g. httpd) will assume that it is the only application providing a particular service, and usually will also assume a certain filesystem layout and environment. This dictates that similar or identical services running on the same physical server, but for example, only differing in their addresses, have to be coordinated. This typically requires a great deal of administrative work which can lead to reduced system stability and security.
The basic concept of the Linux-VServer solution is to separate the user-space environment into distinct units (sometimes called Virtual Private Server) in such way that each VPS looks and feels like a real server to the processes contained within.
Although different Linux Distributions use (sometimes heavily) patched kernels to provide special support for unusual hardware or extra functionality, most Linux Distributions are not tied to a special kernel.
Linux-VServer uses this fact to allow several distributions, to be run simultaneously on a single, shared kernel, without direct access to the hardware, and share the resources in a very efficient way.