BSA == Bethesda Softworks Archive (or something similar) --- It is a compression type sort of like 7-zip or rar used by bethesda to compress and store the game files in that the game can use directly without it having to be decompressed thus saving some HDD space
EDIT : Ninja'd by Wrinkly !! (but at least we both used the same translation for the Acronym)
EDIT 2 : For your second question -- you'll find it used in your Oblivion data folder using .bsa as the extension and if you want to extract the files from within the archive you can get any of several unpackers (BSA Commander, OBMM (Oblivion Mod Manager), etc.)