Whatever system you are talking about, whether it is a server, workstation, personal computer, router, phone, PDA, etc., it has to have an operating system. These devices have thousands of parts and processes that need to be managed in order to get any use out of them. Without an operating system your computer would be a useless pile of metal, plastic, and circuit boards. It is the job of the operating system is to manage all the resources and communication between devices and systems.

The kernel is the lowest level of the operating system. You may have heard of the Linux kernel before but Microsoft Windows has a kernel as well, as do any operating system. The word kernel "is used to denote the part of the operating system that is mandatory and common to all other software." (http://en.wikipedia.org/wiki/Kernel_%28computer_science%29)

From the Wikipedia Linux Kernel article (http://en.wikipedia.org/wiki/Linux_kernel):

The Linux kernel was initially conceived and created by Linus Torvalds in 1991. Early on, the MINIX community contributed code and ideas to the Linux kernel. At the time, the GNU Project had created many of the components required for a free software operating system, but its own kernel, GNU Hurd, was incomplete and unavailable. The BSD operating system had not yet freed itself from legal encumbrances. This meant that despite the limited functionality of the early versions, Linux rapidly accumulated developers and users who adopted code from those projects for use with the new operating system.^[4] Today the Linux kernel has received contributions from thousands of programmers.

Development on the Linux kernel is more active than ever. Support for the operating system continues to grow and with it there is support for more hardware, including handheld devices.

There is a simple article on the Linux kernel philosophy at http://www.handhelds.org/moin/moin.cgi/KernelDevelopmentPhilosophy.