ISO images are files that contain an image of an entire disc. Usually, you download them from the Net and burn them to a CD or DVD to make an install or boot disc.
Windows 7 makes it easy to turn ISO files into discs.
Let's say you've downloaded a lovely ISO of the Linux operating system Ubuntu. If you burn it to a CD, you can boot off the CD and experiment with Linux without having to mess installing it.
Put your blank disc in the drive.
Double-click the ISO file. It will be listed as a Disc Image File under type.
Select the proper drive letter.
And sit back and let it burn.
When you're done, you'll have a proper CD you can boot off of.