I guess this is my first lost in the mail transaction here. It was a book on my wish list for several months so I was really disappointed. However I am confused about one thing, I am no longer #1 on the wish list, it moved me to spot #4 when the book was considered lost by the system. I thought I was supposed to get my old place in line back? Or does this mean other copies were lost in the mail before mine?

It might mean that folks 1 - 3 had a RC or were on hold.  (Both vacation hold and single book hold would keep them at top.)  It could also be that they had it on auto, but didn't have enough credits.  That would keep them at the top rather than toss them off.

You may not have been #1 when the book was offered to you. Between vacation holds, RWPs, lost books, timed out transactions and RCS-there could have been 3 people in front of you.  If it's an older rarely posted book the likelyhood of damaged copies being sent goes up in my experience.