LOD is an abbreviation for Level Of Detail. LODs are simplified models of game objects, usually ships or stations. When an object is far enough away from the camera, the engine switches the high-detail object out for models of successively lower detail. This saves the engine from having to render a complicated, high-polygon model when it only is occupying a few pixels on the screen.
LODs should be invisible to the player of the game if done correctly. Model makers and developers should make use of LODs to save the rendering engine from doing needless work. For now, all LODs must be made by the modeller, but Ogre does have an automatic LOD generation algorithm that may be of use.