Camera ISO is determined by the International Organization for Standardization (the ISO), a network of national standards institutes from 161 countries, which is based in Geneva in Switzerland.
The ISO rating (or speed) for cameras is a measure of how sensitive the camera is to light, at that particular setting. The higher the ISO, the more sensitive it will be, and vice versa.
Camera ISO settings were originally set for film. According to the ISO, 800 speed film was more sensitive than 400 speed film, and 400 speed film more sensitive than 200 speed film and so on. The more sensitive the film, the faster it was said to be and the less light you needed in order to take a picture.
Without getting too technical, the speed of the film was calculated from the optical density (the absorbance of light by a material such as film) and the exposure time using a mathematical equation.
The size of the grains of silver halide in film emulsion determined the film speed. Bigger grains meant greater light sensitivity and vice versa.
An ISO film speed of 50 (that is, a slow film speed) was great for portraiture as the grains of silver halide were smaller and therefore the result was literally more fine grained.
Fast film speeds of 800 or more had bigger grains and were good for shooting when the light was poor or if you wanted to freeze something in fast motion.
However, the result tended to look coarse grained. And if you underexposed your shot the result was even more grainy than if you overexposed it.
Of course the main problem with using film is that if you want to alter the ISO rating you actually have to change the film itself or have an interchangeable back. With a digital SLR you can change the ISO settings frequently, sometimes for each individual shot.
Digital cameras have ISO settings which go beyond 800, up to 1600 or 3200 or even more which means you don't need to fire the flash. At 1600 ISO you can probably take a shot handheld at about 1/30 second indoors in poor light.
Above: Film grain in an image shot using Agfa 1000 RS Slide Film
Another drawback with film is that with higher ISO settings you get more 'grain' (called 'noise' if you are using a digital camera). In the above photo you can see an example of 'grain' on a slide film that has an ISO setting of 1000. Nowadays this is considered undesirable and indeed if you are photographing a sunset or a flower in close-up that is probably true.
But some people still value grainy images as they have a more photojournalistic or documentary feel and grain can create an interesting mood in the picture. Others feel it is more 'artistic' and it is actually possible to add digital noise using photo editing software.
In normal day-to-day use of a digital camera, an ISO speed of 100 or 200 is adequate, usually when shooting out of doors when there is a fair amount of sunlight available or at least bright sky with some cloud. ISO 400 and 800 settings are more suitable for indoors particularly when you don't want to use flash.
If you want the least possible grain or noise in your images go for the lowest possible ISO setting such as 100 or even 50. Just make sure you have a tripod as the shutter speed will need to be correspondingly slower. Kodak film ISO goes down as low as 6. So far as I know there isn't anything lower than that!
If you are about to buy a new camera and want one with the lowest possible amount of digital noise, go for a Canon as they are renowned for their lack of noise, particularly the EOS range. I have used Canon EOS cameras for many years now and because the level of digital noise is so low, I have become used to shooting without flash most of the time. If you really want to buy a superb camera go for the Canon EOS 5D Mark II as digital noise is absolutely minimal.
If you do have a great shot that you took with an ISO setting of 800 or more and it has too much 'noise' you can improve it to some extent in a photo editing programme or better still, buy stand-alone noise reduction software such as Noise Ninja which is a plug-in for Photoshop.
With Noise Ninja, you download the programme and then you get a profile for your particular make and model of camera from the Noise Ninja website. Install that after you've installed Noise Ninja and then whenever you open an image in Photoshop, Noise Ninja will detect automatically the ISO film speed or setting that you used and will apply their custom-made filter. It is easy to use, inexpensive to buy and the quality of the results will astonish you.
Read more about camera ISO settings and how they affect exposure by following the link.