LOL (or its more common form, lol) is one of those funny little byproducts of internet pop culture. Like sdrsa said, lol is an acronym for 'laughing out loud', used not in the literal sense, but more to convey that something said, suggested or otherwise implied is funny.
I've even known people (myself included) to vocalize the acronym in normal, everyday face-to-face or phone conversation, pronouncing it lawl.
The fun doesn't stop at lol though. You may encounter some other net'isms like ROFL / ROTFL (Rolling On the Floor Laughing), lmao (Laughing My A** Off), and the combination kicker ROFLMAO (pronounce rawffle-mow, for those so inclined).
A rarer form that I used to see quite a bit a few years ago is ROFLMAOWTSDMF (Rolling On the Floor With Tears Streaming Down My Face, but I guess that's too much to type.
Take anything followed by LOL with a grain of salt.
