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Hand cancel means that you (or a post office worker) hand stamps the 'cancel' onto the envelope. It's usually done so the invitation doesn't get stuck in the machine and ruined (it can also look nicer- none of those lines on them!)
Does that help?
I never saw cancel! Cancel what? It helps somewhat! Thank you for trying!
The cancel is the ink stamp that is stamped over the postage (after you mail something) and indicates that the stamp has been used. It is the round mark shown here:
Usually only hand-cancelled invitations that are sent to guests in the same city will escape being machine cancelled. Once mail is out of local delivery range it is put through sorting and canceling machines whether or not you request hand cancelling.
Smith-197_2.jpg (2347 KB, 156 downloads) 1 year old Smith-271.jpg (2014.3 KB, 69 downloads) 1 year old 
Check out Mrs. Dahlia's post about it to get more info.
LE4N0932.jpg (99.8 KB, 63 downloads) 1 year old _E4N3307.jpg (186 KB, 31 downloads) 1 year old
A lot of brides have trouble getting their local post office to agree to hand cancel their invitations. (Tip: go to a less busy small town or suburban post office on a quiet weekday morning.) And some brides find that their invitations get run through the machines anyway. For me, it's not worth the trouble-- postal employees are pretty grouchy around here-- I already know what the answer will be if I ask for hand canceling!
Keep in mind that hand cancelling only accounts for one machine. It is solely to cancel the stamp and save it from going through the cancelling machine. The envelope will still go through other machines, to be sorted and such. However, from what I understand, the cancelling machine is the one that could mess up your thick envelopes the most.
The main reason to hand cancel is if your envelope is more thick than normal, or if the invitation has extra things on top (such as flowers, or beading, etc.) that may get ruined going through multiple machines.
@Ms Cherry Pie -- I don't believe that is entirely correct. Envelopes that go through multiple cities don't have multiple cancels on them, they do have to go through the pre-sorting machine more than once though. :)
Ours didn't get any other marks besides the hand-cancel stamp. You can see it here: http://gallery.weddingbee.com/photo/hand-canceling
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I have never heard of this!