In the context of files and programs, an "image", whether an ISO, floppy, or other media image, is simply a file that can be used as a virtually identical copy of the original media. This file not only contains individual data files, but it also contains track and sector information and arranges all this information in a file system, just like disk media. Image files, unlike normal files, are usually not opened; rather, they are mounted.
An ISO image is simply a CD-ROM image saved in ISO-9660 format.
ISO images are mainly used as source files from which to create CDs. As an example, most distributions of Linux release ISO images of the installation CDs. These images are usually available from anonymous FTP servers (such as Indiana University's FTP.ussg.iu.edu server). Once you download the image, you can use CD burning software to recreate the physical CD-ROM install media.
So you could take a game like halo 2 and instead of it having the folders bink maps media and those other xbes you could somehow make that an iso and it would be the same thing.
