Lag is a condition where your ping is higher than those around you. The higher your ping is, the longer it takes for your computer to receive and send information. When you have a very high ping, it will cause problems for both you and your opponents. When you see an enemy, you will be seeing their old location. When you shoot/claw at them, they'll really be a bit away from you. Your enemy will see a figure frozen in place, and you will unfreeze and move to a different spot at random intervals, making it hard to catch you.
It is generally accepted that having a ping of about 100 or less is optimal. You may sort servers by their ping, to see which one is closest to you, and will thus give you the lowest ping.
Some servers run a modification called Unlagged. This helps compensate for lag and helps to predict where lagging players would be based on their current motion and speed. Unlagged has it's own set of problems and is not endorsed by many players as being a good solution to lag.