It does support iscsi. There is a builtin software iscsi target. Configure it from the VI client.
Free ESXi fully supports hardware and software iSCSI, Fiber Channel or NFS.
VMware vExpert '2009
Yes ESXi Free does support iSCSI, both via a dedicated iSCSI HBA and the built in software initiator
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Tom Howarth VCP / vExpert
VMware Communities User Moderator
Contributing author for the upcoming book "[VMware vSphere and Virtual Infrastructure Security: Securing ESX and the Virtual Environment|http://my.safaribooksonline.com/9780136083214]”. Currently available on roughcuts