Acronym for InterNet SCSI. iSCSI is a method of encapsulating SCSI over TCP/IP. It is defined in 
RFC:3720,
An end user will send a request for some data. The OperatingSystem will generate SCSI commands and a data request, which are then encapsulated and encrypted by the iSCSI driver (the initiator). A packet header is added and the IP packets are transmitted over the Ethernet.
An iSCSI device receives the packet, decrypts and disassembles it, separating the SCSI commands and request. The SCSI commands are sent through the SCSI controller to the SCSI device (the target). Data will be retreived and returned in the same fashion.
Unlike NAS, iSCSI makes block devices available via the network. You access the disc as if it was mounted locally, and can use any FileSystem of your choice. However, because it is being handled as a block device, only one system can use the iSCSI device at a time. To get around this you will need to use a global or read-only FileSystem.
iSCSI has gained popularity over FibreChannel? over IP (FCIP) because it can run over standard Ethernet networks.
See also:
WikiPedia:ISCSI
A Quick Guide to iSCSI on LinuxiSCSI initiator driver for LinuxArdistech's iSCSI target driver for LinuxiSCSI resources for Windows