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Digital cameras are a bit harder to explain, so they kept the film equivelencies so it makes sense to use laymens. With that said, I'll explain the basics, as I know them. (Which may or may not be completley correct.)
Ok, what ISO XXX means is how sensitive the film is to light. The higher number (is ISO1600), the more sensitive it is. What this means is that with a higher ISO, you can have a faster shutter speed.
Ex. In a certian room with certian lighting, the camera set to ISO 200 might need 1/60s shutter speed to get enough light onto the sensor/film to have a properly exposed image.
In that same room if you have the ISO at 800, you might be able to use 1/125s shutter speed to have a properly exposed image.
Now, why does this matter?
Well, in low-light situations, you might want to increase the ISO so that you can use that higher shutter speed to stop the motion of your hand or your subject better.
Well then, why don't we always use ISO 1600 or 3200?
Film Grain. Even though the higher ISO films are more sensative to light, there is still only "x" amount of light hitting it. The higher ISOs have very noticible grain, and for most of the time, you want low grain photos. So you try and stay around 100-400 ISO and just open the aperature up or deal with lower shutter speeds to keep the photos looking clean.
Here's an example of a photo taken at ISO800. (Not mine, you can see his thread here)
I have a s5100, i got it really cheap, ($249 new with 256mb XD) Im playing with the manuel controls, so far i seem to like it, The point and shoot sucks, But im haveing fun with manuel and shutter priority mode. Im thinkin i could get into this hobby, but like allways, I find my self wanting a upgrade, and im not even sure i know what im doing yet... HAHAH...