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Both iSCSI and SAN technology were designed to provide location-independent storage to computers. From the standpoint of the operating system, most applications and software can't tell the different between local storage and a mounted iSCSI or SAN volume. So, yes, you can definitely run your virtual machine files stored on an iSCSI-enabled device or within a SAN configuration.
That raises the question of performance. Since virtual machines can cause a lot of disk I/O, it's important that you test overall performance before relying on remote storage. In some cases, a well managed SAN or iSCSI architecture could improve performance. In other cases, problems such as latency or low bandwidth could cause your VMs to crash (remember that the guest operating system is expecting to access a local hard disk, and it's not willing to wait long for a disk I/O request to complete). Overall, using Virtual Server with remote storage can improve performance and manageability, but be sure to test your configuration.
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