ISO represents the film or digital sensor 'speed'. In other words, it represents how much light is needed to expose the image properly. Film is typically rated from 200 to 800; however modern digital cameras can have ISO values from 50-6400 and are improving all the time. The lower the number, the more light is needed for proper exposure.

Many professionals opt for the lowest ISO rating they can use while still getting a good exposure. This is because the film or sensor is able to capture a greater range of color the lower the ISO rating is.  ISO also affects how grainy the image is as well, and the lower the number, the less grainy it is. To compensate for needing more light to expose the image, professionals buy lenses with large apertures, also commonly referred to as a 'fast' lens or 'fast glass'.

In the film days, you were stuck with one ISO rating per roll of film, but with digital cameras, you can change the rating from picture to picture.

I generally use the lowest ISO number that I need for a given situation. If I'm shooting a landscape, I tend to not need a really fast shutter speed and can get away with using the lowest ISO my camera will allow (which is 200). This helps improve the detail in the shadows and reduces the amount of grain in the picture.

It's a juggling act between shutter speed, aperture, and ISO. When you need more light, you need to use a larger aperture, slow down your shutter speed, or use a higher ISO. If the situation permits, and I want a large depth of field, I use a smaller aperture and start reducing my shutter speed. If I want a more narrow depth of field, I'll use a larger aperture. If I can't go any slower and capture a sharp image, and my aperture is maxed, then it's time to raise the ISO rating.

By raising the ISO, you can get a shot in a darker environment, at the expense of additional grain or 'noise' in your image and a slightly flatter image because the range of color is narrower. Sometimes this is the best you can hope for; however, digital cameras are getting better at capturing a larger color spectrum, but these are still on the high end expensive cameras.

When considering using a high ISO vs. using the camera's flash, I'd much rather have a grainier picture and increase the ISO setting.  High-end DSLR cameras have in-camera software that reduces the amount of grain in your picture, and you can use Photoshop to adjust the levels of the picture to compensate for flat looking pictures; however, the more time you spend fixing pictures the less time you'll have to spend actually taking pictures, and you won't be able to get detail that the camera never recorded.

To give you an example, I have a 50mm 1.8f lens. If I bump my ISO to 1600 (the highest my camera goes), and use the largest aperture of 1.8, I can shoot indoors without a tripod or flash as long as there's a reasonable amount of light available. Usually, in this scenario, I'm shooting candid photos, which tend to turn out much better because it's a lot easier to get natural looking photos when a flash isn't constantly firing. People tend to get annoyed if they're trying to have a peaceful get-together when they're occasionally blinded by flashes of light.

On the other extreme, if I'm shooting a waterfall, I want to reduce the amount of light as far as I possibly can so that I can keep the shutter open as long as I can. This produces that smooth water effect that most waterfall pictures have on postcards. To do this, I'll use a small aperture, low ISO, neutral density filter, and shoot when it's almost dark.