This term originated in Warcraft III. While playing a custom map called Elimination Tournament, somebody died and yelled "LKAG," which was supposed to be "LAG." The server had not been lagging, and the message was supposed to be an excuse for being a n00b.
The term is usually used to make fun of a blatant excuse. It's a very condescending remark, much like lol internet and QQ.
Storm_Surge killed killer45 with the shotgun.
killer45: wtf omg lag!!1