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A virtual LAN, or a VLAN as it is often referred to, is a virtual network of servers that are not co-located like traditional servers. They could even be on different network segments, but they are bound together by software as if they are co-located on the same segment.
So when you are creating an iSCSI SAN, you can create the same efficiencies for a VLAN as you can for a co-located SAN and what you are really doing with the VLAN and iSCSI SAN is creating a virtual datacenter spread across the network cloud. With a VLAN, you still need to separate your storage traffic from your regular network traffic, but it becomes your virtual datacenter.
Check out the entire iSCSI SAN FAQ.