Light instances are just what you think. They have a position in space (defined by a MATRIX44 instance), and and various parameters like color that you can twiddle. When you send a :DRAW message to a camera, you can specify a list of lights to use. If you don't, Skandha4 will supply a default light.
The light parameters are much like those of the SGI Graphics Library, with some small attempt to be a bit more abstract.