Since iSCSI technology relies primarily on your network interface card, as long as the virtual NIC is supported...
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by the iSCSI implementation you plan to use, it should work fine. Microsoft supports iSCSI with Virtual Server 2005 R2. Complete details are provided in a document entitled, "Using iSCSI with Virtual Server 2005 R2". Microsoft also provides a free iSCSI initiator for use with Windows machines (see "Microsoft iSCSI Software Initiator Version 2.02"). The initiator can be installed within a VM to connect directly to an iSCSI target.
The story with SANs is a little different. Host Bus Adapters (HBAs) are physical cards that must be installed in a machine, so your virtualization platform has to provide specific drivers or emulated hardware for that purpose. I'm not aware of any current virtualization platforms that provide this functionality. Of course, you can always take advantage of HBAs in the host operating system: For example, with Microsoft Virtual Server, you can mount remote volumes and then use the "linked disk" feature to make it available to a VM. Hopefully one of these options will help you get the configuration you're looking for!
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