Oops, late to the thread.
Oh well,
Kernel Panic occurs when the kernel notices something bad happening in its own memory space. When a regular (aka user space) application (like Safari) does something bad, like accessing memory that doesn't exist, the OS shuts that application down on the assumption that it must have corrupted itself if its doing silly things like that.
When the same thing happens in code in the kernel, you get a kernel panic. Imagine, for example, that in the above example we are talking about a device driver (ethernet card) instead of a user space application (Safari), and that device driver tries to access memory which doesn't exist.
Now the kernel realizes that something in its own memory space is possibly corrupt. Because the kernel provides all the basic services of the system, it can't simply just stop itself like it would do with a user space application. So you get a kernel panic instead, which basically is the OS saying "whoa, stop everything".
If it happens rarely, don't worry about it. If it happens a lot, it means something is wrong with your computer. It is a sign of a problem, not the cause of it. Frequent kernel panics generally have to do with bad hardware (faulty RAM, faulty controller, etc.) or else bad kernel plugins (device drivers, network stacks, file systems, etc.). Usually its easy to troubleshoot because the kernel panics will start occurring shortly after you have installed a new piece of hardware, or software, or both.
