Without it, nothing can or will work. It allows direct interface between the user and the system. Win uses 'explorer.exe' for it's interface, but this can be changed, for example, Litestep. Closest to your hardware lies the X server, this program handles the low level communication with your video card. The x server takes input from your window manager, a client program that control the window properties.
Examples are fvwm, window maker, kde, enlightment.
On top of this the user programs, called clients, run. This might be xmms playing mp3. Gnome is also a kind of client running on top of the window manager.