Internet is
a network of interconnected organisational networks.  Communication between two computers on the
Internet is handled by other computers called routers and gateways and is
inherently not private.  In contrast with
telephone circuits, Internet communication networks are public and shared.  It is simply too expensive to dedicate a line
for the communication and efficiency and cost effectiveness comes at the cost
of privacy.
IP header 
    of a packet that is sent over the Internet contains the IP address of the 
    intended receiver in the network.  While 
    surfing the net computers are constantly sending messages to other computers 
    and remember that most of these computers are parts of local area networks.  
    Ethernet 
    is the most frequently used set of protocols for connecting computers together 
    in local area networks.  The way Ethernet 
    works is that a packet is transmitted to all the computers in the network 
    and only the computer with the matching IP address is supposed to accept the 
    packet.  Worth pointing out that this is the case if 
    the network is not so called 'switched'.  A 
    switched network is configured to comprise of a number of segments and a switch 
    is referred to a filter that forwards the packet from one segment to another.  
    A computer in the network can be configured to accept all messages 
    irrespective of IP address of intended receiver (we say the computer is put 
    in promiscuous mode).  A sniffer is software that accepts all the messages 
    that travel into and out of the computer attached to LAN.
Implications
are pretty high.  Note that with Ethernet,
login code and password that is passed from one computer to another is in clear
text format and it is not therefore surprising that sniffing is a very popular
form of attack that is employed by the hacker.