Point...
Catherine touched on this, but I want to be a bit more explicit:
There are 2 systems involved when you are playing: The client (your computer) and the server (the "Simulation"

.
If EITHER one is laggy, you will notice. The Stats in the "Alt-1" screen display both: The numbers and big chart at the top are ONLY your local machine's stats - the ones under the "Simulation" heading are ONLY the server's stats.
If your home machine is running at slow FPS or doesn't have good connectivity (i.e. Bandwidth stuck down around 10 or less kbps), then the "Simulation" stats don't mean a thing - because your home machine can't keep up with the server (example: You press the button to move forward. By the time the Server gets the information that you've been moving, its been a 'long' period of time - so the server says "gee, this person should have moved a fair distance". It sends that back to your machine, and you see your avatar "skip" a bigger-than-expected distance. By the time your slow machine has processed the response from the server, drawn the screen, and updated again to tell the server not to move anymore, the server still thinks you've been moving all that time - so you continue to move for a little while after you release the key).
And the reverse is true: If your machine at home is running 60 FPS and the server is under a lot of load, your computer will be trying to update a lot more often than it can get new data from the server. Since the server is responsible for tracking where everything is in the world (including your avatar's movements), things will appear to "stutter" and not be responsive (because the server is playing "catch up" to your machine, your local machine thinks you've moved farther and the server thinks you've moved less. Since the server is always considered to be correct - for technical reasons I won't get into here - it "resets" your Avatar back to where it thinks it should be).
So you can see that "lag" and graphical glitches can come from a variety of sources.
Looking at the "Alt-1" display from top to bottom, here are some general tips:
FPS:
Movies run at about 24 - 27 FPS. Some people find 15 FPS comfortable, but for things to appear "smooth", you want 25 - 35 FPS at all times. The more "stuff" there is on the screen, the harder the video-card has to work, so you want to pay attention to these numbers when you're in an area with a lot of Shops or Avatars. This is because video cards draw almost everything in terms of little triangles - so everytime the screen is drawn, the video card has to solve mathematical equations to "build" what you "see" on the screen. I'll spare you all the technical details - but suffice it to say that its LOTS and LOTS of math to draw a screen full of objects. The more math the video card has to do, the longer it takes to complete the scene - and it can only draw the screen when ALL the math in one scene (or "screen-full"

is done. The short version: The more (or further) you can see, or the more detail on the screen - the slower your video card will draw things. If you find your FPS below about 20, you really ought to go to the "Preferences" screen and turn off some of the Graphics detail. Here are some things to try, in a somewhat-prioritized list: Shorten your line of sight,Turn off Anisotropic Filtering, Turn off Bump-Mapping and/or Cloth effects, lower the Terrain detail, lower the Object detail level, lower the Avatar detail level, etc. "Fog" and "Gamma" options will do nothing for your FPS. Changing to a lower resolution will provide a slight improvement - especially on older hardware. But the line-of-sight or "view distance" will have the biggest impact.
Bandwidth:
If this is low, it might simply be that you're on a Dial-Up connection and have limited access. Objects and Music will download slowly - so turning down the graphics detail will help some when travelling to new areas. TECHNICALLY it will only help when your system is trying to load/rez new textures, prims, etc (i.e. when you're moving around in the world). If you sit in one spot without moving, adjusting your graphic detail won't really make a difference in the lag you experience due to bandwidth limits. If you are on dial-up and this appears to be low, you might call your DSL/Cable provider and ask if there is a problem. NOTE that SecondLife only uses as much bandwidth as it needs to - so again you will only notice a "High" amount of traffic when travelling to new areas that cause objects to be rezzed/loaded. Sitting in one place, even on broadband you'll see your Bandwidth sitting pretty low on the scale. If this goes "dead" or you experience a lot of packet loss, then something is wrong with the network connection between your machine and the server - possibly a problem on the internet; but also possibly a problem with your LAN (home network). I recently had problems with my router that were causing my bandwidth to get cut off every 5 minutes.
Whew, this is getting long so I'll take a break - but problems in the "Sim" part of the stats readout can only really be affected in two ways:
1) Get LL to put your sim on a better/faster server, or
2) Only allow a limited number of Avatars in your sim at any one time; and don't put up too many buildings / prims or scripts in the area.
Take care,
--Noel "HB" Wade
(Tread Whiplash)