When used in reference to bands, it generally means that when they record their music, they intentionally do it so that the final product isn't really finished; it still sounds rough and unpolished.

The majority of the music you hear has been tweaked and modified using studio equipment, but generally these lo-fi bands pride themselves on using the raw recordings.

Here's a forum thread in which members listed some of their favorite Lo-fi bands and albums:
http://www.last.fm/group/Lo-Fi+music/forum/20234/_/51769

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