Potential packet sniffing weakness has been described on the Weakness Wiki page. It states that an attacker that can see all of our internet traffic can pick up which transactions originate from our machine, thus figure out what Addresses we have in our Wallet. What are the ways one can secure one's Bitcoin Client from such an attack?
A hacker that has physical access to your network and computers can always find a way to abuse that access but SSL is a very good deterrent and is supported by bitcoind. Click here to see a guide on enabling SSL for bitcoind.
For securing the communication between nodes you might want to try tor. It basically makes sure that all traffic on your network is encrypted but still allows you to connect to an encryption-less service.