Even more: screen doesn't even always do that... I'm always in a screen, and if I scroll in iTerm2 (yes: using my trackpad as a mouse-wheel) it usually works the way I'd expect (I can naturally scroll back through the recent history of my shell session), and I can additionally scroll in screen (which will have weird ramifications, of course, on my local terminal scroll-back). (I have found this offers "best of both worlds", as I can get my recent scrollback locally and gracefully, but can dig through the history to get things I may have typed from different machines.)

Mess with the two checkboxes here: http://cl.ly/image/0K1A1w2m3X2c

Those are located in the Terminal tab of your Profile.

Also, go to the docs and see the following sections:

- Save lines to scrollback when an app status bar is present

- Disable save/restore alternate screen

Those contain the respective explanation for the two options.

http://www.iterm2.com/#/section/documentation/preferences