The first step is to download Daemon Tools. Make sure you get the latest version! During the installation, make sure you uncheck the DAEMON Tools Search Bar. You do not want that installed.

When DAEMON Tools starts, you will see a red lightning bolt icon in your system tray, near the clock. You will use this icon to interact with the Daemon Tools program.

Right click on the system tray icon and choose Virtual CD/DVD-ROM, then Set Number of Devices. Choose 1. This will create a new "virtual" CD-ROM drive on your computer. It is assigned a letter, like E:,  just like any other drive on your computer.  

Now that the drive exists, you can mount your ISO image file. Richt-click on the icon again and choose Virtual CD/DVD-ROM. Then select the drive that was just created - it should start with Device 0:. Then click on Mount Image.

Now simply select the ISO image file you want to mount. Daemon Tools can mount many other image file formats, including BIN, CUE, MDS, and more.  

Once it has been mounted, your new virtual CD-ROM drive will act as if it has a CD or DVD inside, with the contents of your ISO image file. Try opening your virtual drive in My Computer. Windows can't tell the difference between your virtual drive and your real CD/DVD drive.

It's worth noting that some new video games require you to unload Daemon Tools before you can play the game. This is to prevent privacy. To exit Daemon Tools, right-click on the icon and choose Exit.

Also check out our tutorial on how to burn the ISO image to CD/DVD with more free software.