To add to what Saerules wrote, a reputation is basically someone saying this is a cool person for various reasons. It helps us recognize and compliment some of the members who have something good to say and say it well. Typically, the more reputations you give, the more you get back.
For some it's a popularity contest, as noted above. Also giving a negative rep can result in a returned negative rep and things can really get wanky from there. Once we had a Christian who gave negative reps to all the atheists just for being atheists. I had fun (not really) cleaning up that mess.
While the reputation is about the person, the kudos are about the posts. If you want to easily say "Hey, that's an awesome post" without fluffing (See my
Netiquette guide for details on that) you can give the thumbs up.
Eventually Adrian implemented a way to tally how many kudos a person gets, and that goes into the Top Members list, linked at the top of the page. As a result, it has turned into another popularity contest. Top posts works in a similar way, but instead of tallying kudos that a member gets, it tallies kudos that a post has received.
In the end, the repuatation and kudos system are great ways to give recognition to people who say great things, frivolous popularity contests aside.