An .ISO file contains an exact digital image of a CD or DVD that you can send electronically to somebody else and then they re-created it on blank media. Several OSes (i.e.: Linux boot CDs) and applications are made available on the Internet using this file format.
If you don't want to burn these files to a disk, some applications such as CloneDrive allows you to mount the ISO file as a virtual CD. You won't be able to boot your system from a virtual CD, but you can access it and copy or execute files on the virtual media.