What is mean by 'server','instance' in MSSQLServer 2005

A server is a (physical or virtual) machine hosting SQL Server software.

An instance is a collection of SQL Server databases run by a single SQL Server service, ahem, instance. You can view each separate instance you're running in your service console. Each instance can be started or stopped individually.

You're meant to use instances to partition data and policies. Each instance has completely separate databases, connection configuration, and security credentials.