An ISO file is an image (copy) of the PS game on your hard disk. I have an ISO of ISS PE2 (a PS1 game) on my hard-drive, copied using software called 'Blindread' ('CDRWIN' is another good program to do this. Both have trial versions downloadable for free on the internet).
Once you have copied the game off the cd onto your hard disk you can then play it, without the need for the cd in your cd-rom drive, using an emulator ( I use epsxe). You can also add patches etc, and burn it back onto a cd if you have a cd-rw, to play the patched version on your playstation (although I think you need your ps chipped to do this).
Hope this helps...