In the natural sciences an isolated system is a physical system without any external exchange – neither matter nor energy can enter or exit, but can only move around inside. Truly isolated systems cannot exist in nature, other than possibly the universe itself, and they are thus hypothetical concepts only. It obeys, in particular, to the first of the conservation laws: its total energy - mass stays constant.
This can be contrasted with a closed system, which can exchange energy with its surroundings but not matter, and with an open system, which can exchange both matter and energy. The only truly isolated system is the universe as a whole because, for example, there is always gravity between a system with mass, and masses elsewhere. Real systems may behave nearly as an isolated system for finite (possibly very long) times.
The concept of an isolated system can serve as a useful model approximating many real-world situations. It is an acceptable idealization used in constructing mathematical models of certain natural phenomena; e.g., the Sun and planets in our solar system, and the proton and electron in a hydrogen atom are often treated as isolated systems. But from time to time, a hydrogen atom will interact with electromagnetic radiation and go to an excited state.
In the attempt to justify the postulate of entropy increase in the second law of thermodynamics, Boltzmann’s H-theorem used equations which assumed a system (for example, a gas) was isolated. That is all the mechanical degrees of freedom could be specified, treating the walls simply as mirror boundary conditions. This inevitably led to Loschmidt's paradox. However, if the stochastic behavior of the molecules in actual walls is considered, along with the randomizing effect of the ambient, background thermal radiation, Boltzmann’s assumption of molecular chaos can be justified.
See also 
In an Isolated System entropy can only increase.
- Thermodynamics of Spontaneous and Non-Spontaneous Processes; I. M. Kolesnikov et al, pg 136 – @ http://books.google.co.za/books?id=2RzE2pCfijYC&pg=PA3&lpg=PA3&dq=isolated+system+hypothetical&source=bl&ots=yCbvTcGaVv&sig=O6E_yw9CCX2zd8PzINxZiYuRT3Q&hl=en&sa=X&ei=_UWqT-z_KsbP0QWXpcz1Dg&ved=0CEgQ6AEwAA#v=onepage&q=isolated%20system&f=false
- A System and Its Surroundings; UC Davis ChemWiki , by University of California - Davis, @ http://chemwiki.ucdavis.edu/Physical_Chemistry/Thermodynamics/A_System_And_Its_Surroundings#Isolated_System
- Hyperphysics, by the Department of Physics and Astronomy of Georgia State University; @ http://hyperphysics.phy-astr.gsu.edu/hbase/conser.html#isosys
- Open, Closed and Isolated Systems in Physical Chemistry, in Foundations of Quantum Mechanics and Physical Chemistry, by Prof Bryan Sanctuary, Professor of Chemistry at McGill University (Montreal) @ http://quantummechanics.mchmultimedia.com/2011/physical-chemistry/open-closed-and-isolated-systems-in-chemistry/
- MATERIAL AND ENERGY BALANCES FOR ENGINEERS AND ENVIRONMENTALISTS, pg 7, by Imperial College Press @ http://www.icpress.co.uk/etextbook/p631/p631_chap01.pdf