Iso files are complete captures of your installation CD or DVD-ROM. They are typically used in a virtual environment where they are uploaded on a (VMFS) datastore using (for ESX 3.0.x) an SCP tool such as WinSCP, Bitvise Tunnelier or Veeam FastSCP or for 3.5.x a copy/paste in the Virtual Infrastructure Client and mounted in your virtual machine.
Do not forget to create your own .iso file using Alex Feinman's excellent isorecorder. Just create a folder with a useful name (example: SCOM2007), put all your SCOM 2007 files in there, right-click the folder and select Create ISO image file. A file called SCOM2007.iso will be created. Upload the .iso to your datastore, mount it in a virtual machine and it's ready to use.

