Scanslations are to manga* what fansubs, or more specifically, digisubs are to anime - fan-produced translations, produced and released in digital form to the otaku public as a labor of love.

Given a scan of a Japanese-language manga work (series compilations are usually favored over the original magazine for this, as they are printed on better-quality paper) a scanslator (the word "scanslation" refers to both the process and the ultimate product) will translate the Japanese text, hopefully attempting as he or she goes to massage it for optimal readibility without sacrificing content. In an average series like, say, Fruits Basket, this may take the form of annotating onomotopaea or writing footnotes to explain culture-specific references, sayings, or puns. Working with a h-doujin, this could mean deciding what kimochi ii is equivalent to when used as a sexual cry. This done, scanslators use an image-editing application like Photoshop, and/or, ideally, lettering or layout software to replace Japanese text with English. This should not be dismissed as "grunt work", as between the issue of kanji making it possible to write complex ideas in a small space and the fact that Japanese is sometimes written vertically, fitting what you want in the captions and speech bubbles you're given can be a bit of a challenge. Fortunately, once a scanslator gets past this obstacle, they're essentially done. All that remains is to distribute it, posting it to websites, transferring it as a .zip file over IRC, and the like.

As Japanese illustrated entertainment enters further into the mainstream of American culture and more and more manga titles are picked up by American distributors for commercial stateside release, scanslators are starting to face some of the same ethical issues as fansubbers with regards to dealing with work that is, or is likely to be at some point, released through parallel, commercial channels, although given the sheer volume of manga produced, there will likely always be plenty of work even for "ethical" translators. That said, I expect these concerns to create even less of a dent in scanslation output than has been done in fansubs. Anyone with a scanner, a copy of Photoshop, a good kanji dictionary, and fundamental grasp of Japanese grammar and basic vocabulary can scanslate a goodly-sized manga volume or doujinshi by themselves in as little as a day, and the comparatively small volume of image files means the results can be hosted and distributed without need for a large network of connections. These low barriers to entry and "lone wolf" style mean that competition to release a title might be even heavier, social pressure from inside the "community" will be a less powerful force, and even if an individual translator drops a project, there'll always be someone else to claim the glory for themselves. Or, in summary, until and unless manga is given near-simultaneous bilingual releases (Kodansha has made some steps in this direction), one can fairly expect scanslations to stick around.

* While the term is only widely used with reference to manga translations, there is no reason it could not be applied to the translation of European or other sequential art, or the translation of English-language comic books to other languages.