An animation (anim) is a type of item in Second Life which animates an avatar (also by gesture). An avatar animation is typically created using Poser or an open-source program like Avimator or the more slightly more recent QAvimator (or any program that exports to BVH format--which SL only accepts at this time), uploaded to SL from the File Menu, and edited further in SL's animation preview window. A lot of built-in animations that can be used are found in the user's inventory.
Creating an animation
Animators using Poser or Avimator or even motion capture suits upload data to create all the animations an avatar needs.
High quality animations can be worth a lot of money. One notable example, Stroker Serpentine, inventor of the 'sexgen' bed, which rezzes poseballs to animate avatars for simulated sex, earns in excess of six figures a year with his furniture using his custom motion captured animations.