A Radio Station that is on the Internet.
Okay, this is really a misnomer. It's not really radio, it's really streaming audio over the net. We say 'radio' because thats what we've been used to for the last century, and so the name does work to describe what it does.
Internet radio in a wide capacity can be traced in large part back to a company called "Progressive Networks" (now "Real") and their product "RealAudio". Their technology was way ahead of it's time and the first beta release in 1994 finally allowed (however low fidelity) audio to be sent live via the internet over a 28.8kbps modem link. Due to the slow processors of the time it was limited to roughly 8- to 11-kHz, but that would soon change as as the speeds of the encodong and decoding machines increased.
However, due to the interest of money and platform compatibility, a large majority of internet radio is now going to streamed Mpeg audio, aka MP3. THis has a lot to do with the fact that there are many Streaming MP3 servers that are free (versus Realmedia Server which goes for something like $8,000 right now), and almost every MP3 player on every platform now supports streaming Mpeg. Microsoft has tried to get a foothold in audio but due to limited platforms and requirements of a dedicated machine, it Windows Media Audio hasn't really caught on in the internet radio world.