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On the internet, data gets transferred from source to destination in "packets". Each packet contains a part of the full data to be transmitted plus some logistical data, as checksums, sender address, receiver address and more. Due to bad network lines and/or hardware failure it happens, that packets get damaged or lost altogether, resulting in what commonly is referred to as "Packet Loss". Since each packet is labeled with a number the receiving part of the connection can check, if all packets of a certain data stream have been received, and if not, request a resend from the original source.
This results in reduced transfer rate and can be witnessed inside Second Life as "lag". A typical situation, where packet loss is a likely cause, might be an avatar sinking into the ground while walking down a street. "Snap back" of objects while being edited are most certainly caused by packet loss, too.