ISAAC is a cryptographically secure pseudorandom number generator, and a stream cipher designed by Robert J. Jenkins Jr (see ISAAC).
You can find the standard Java implementation used here.
ISAAC instance creation
When a client logs into the server, two instances of ISAAC are created,
and the generated seeds are transmitted between them.
One instance is for encryption, and one for decryption.
The seed is comprised of 128-bits, half is generated by the client, and
half by the server.
This is to ensure that no individual entity has entire control of the key generation process.
Use in the client
ISAAC is used to encrypt and decrypt packet opcodes before transmission, to make packet manipulation harder.
When a packet is sent, its opcode becomes the original opcode added to the generated ISAAC opcode from the encryption instance.
The packet opcode is decrypted analogously on the server.