Do you have your OS install disks?
Let us know
If you can find them or borrow a set you can put the disk in the drive then boot your machine with the C key held down.
then go through the installer menu till you get to Click the volume that you wish to install to, click Options. Select Archive and Install. then select the volume which already has Mac OS X installed.
This way your mac will reinstall the OS and keep all of your documents settings etc in a folder called previous system.
Let me know if you find the disks.
Those should work fine, Just follow the instructions I posted.
Unfortunately with a Kernel Panic like this the only fix is to reinstall, However at least with OSX you can perform the archive so that you can keep your files.
Let me know if you need more info or have more problems.
turn the machine off, then press and hold the mouse button and power the machine on.
Keep the mouse button held down till the disc ejects.
Let me know what happens.
Do you have another Mac and a firewire cable?
I want to try putting your damaged Mac into target mode so that it acts like a firewire drive, This way you can copy your files to the other machine if disk diagnostics dont work.
Power off the damaged machine and connect the two machines with the firewire cable and Start up the damaged machine, immediately press and hold down the T key until the FireWire icon appears and shortly after it should mount on the good machines desktop.
Let me know whenyou get that done.
Did the other drive mount on the good machine?
If so could you open your Macintosh Hard Drive and go to Applications,Utilities then open Disk Utilities and use First Aid to scan your damaged machines drive.
Just come back and post here, I check my email approx every 30mins so I should know when you are here.
Choose repair disk and let it run to see if it will repair your OS, Once it is finished shut down the damaged machine an see if it will boot.
If it will not then reconnect it using the firewire and remove any files you want to back up to your good machine.
Then try booting the damaged machine from your OSX disk and see if you can reformat and reload the damaged machine.
Let me know how you get on.
Just boot with the cd in the machine, Press and hold the C key down as soon as you let go of the power button.
Then when it opens to the installer select format(journalled)
Let it format then install your OS.
Let me know if you have any issues.