There are numerous things that become possible through the use of UML. Network services can be run from an UML environment and be totally sequestered from the main Linux system in which the UML environment runs. Often, UML is used to set up Honey Pots, which allow one to test the security of one's computers or network. UML may also be used to test and debug new software, including Linux kernels without adversely affecting the host system.
As of Linux 2.6.0 UML is integrated into the main kernel source tree.
Originally, UML was going to be called "Linux on Linux," but the idea was shot down because the developers thought that there was something funny about it.