user-supplied data are included in the resulting page without HTML encoding, this will allow client-side code to be injected into the dynamic page.
A classic example of this is in site search engines: if one searches for a string which includes some HTML special characters, often the search string will be redisplayed on the result page to indicate what was searched for, or will at least include the search terms in the text box for easier editing. If any occurrence of the search terms is not HTML entity encoded, an XSS hole will result.
At first blush, this does not appear to be a serious problem since users can only inject code into their own pages. With a small amount of social engineering, however, an attacker could convince a user to follow a malicious URL which injects code into the results page, giving the attacker full access to that page's content. Due to the general requirement of the use of some social engineering in this case (and normally in Type 0 vulnerabilities as well) many programmers have disregarded these holes as not terribly important. This misconception is sometimes applied to XSS holes in general (even though this is only one type of XSS) and there is often disagreement in the security community as to the importance of cross-site scripting vulnerabilities.