An ISO image is an image of an optical disc (CD, DVD, etc.) which can be stored and transferred on other media. It is based on the ISO 9660 filesystem, but can also store other sorts of data. (However, audio CDs are unable to be stored in this format because of technical differences in that format; the DDP format can be used instead.) It is an uncompressed image containing all data on the CD.
Many operating systems permit "mounting" of an ISO file where it is treated as if it were a disk drive. Also, many archiving programs will open ISO files and let you extract the files contained within.