Satheesh, most often I've gotten this because I set up /etc/lilo.conf to point to the wrong disk partition. The bootloader is looking in the wrong place. This can happen because either you've edited lilo.conf to point to the wrong place, or you mixed up the mount points during installation with a graphical installer.
Post your lilo.conf and your /etc/fstab and give more details about your system (which distro, etc).
A simple solution if this is a fresh install is to unplug any flashdrives you might have had installed at the time of the install and do it over.
Rest assured, however, that a kernel panic is not a big deal and is totally fixable: it will definitely not wreck your system in any way (is there more than way to wreck a system?)