What is a .iso file?
A .iso file is a disk image, meaning it's an exact copy (sector by sector) of a disk, e.g.: CD, DVD, USB stick, hard drive, etc... ISO images have been the most used file format for cloning or duplicating disks for a very long time, namely since the late 1980's along with the first consumer CD-ROM products.
How to use or extract ISO images contents?
ISO images are mountable and burnable/clonable onto real media universally (on any OS). You can also browse and extract specific files from ISO images using small shareware utilities such as PowerISO. Mounting a .iso file makes a new drive appear on your OS, effectively letting you use it as if you had the original media inserted.
ISO images can also be attached to almost all emulators since it's universal. Namely, SheepShaver, QEMU and Basilisk II all support you attach a .iso disk image to them. It will mount as it were a hard drive on the emulated desktop.
Under Classic Mac OS (before Mac OS X)
Mac OS 8.5 to Mac OS 9.2.2: Toast 5 Titanium
Mac OS 7.0 to Mac OS 9.2.2: Virtual DVD-ROM/CD Utility
Under Mac OS X
Use Disk Utility bundled with every Mac OS X environment: Launch Disk Utility > FILE menu > Open disk image...
Open it using PowerISO
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