Customer present=customer in front of you with his/her card.
Customer not present=customer not there, ie. internet sale, telephone
It is a breach of a merchant agreement to process a card as customer
present if they're not; although there are agreements which allow
customer not present to be used even when the customer *is* present
(this is how many shops sell "low risk" goods such as insurance policies
or goods tied to addresses (so they don't have to use a different system
for people phoning up and those coming into the shop).
The lead time on implementation of Chip & Pin has been frightening - I
was first working on this in 1997; and it still isn't implemented
everywhere by any means. The introduction of AVS/CSC in the past couple
of years has dramatically reduced fraud for customer not present
transactions to a point where (currently) the situation is acceptable to
the card issuers - as long as, like everything, it is properly enforced.