Create a virtual CD or DVD drive on your Windows computer

First off, you need to know why a virtual CD or DVD drive would be useful. There are many reasons for this. It allows you to use disk images without the need to burn an actual CD or DVD, and you can then install software that way. You can use it to test a "disk" before you burn it. You can also use it to access various disk image files that may normally require specific software to work with. It's also nice because you can browse the contents of an image file by mounting that image in your virtual drive.

I use Daemon Tools (see below), but recently found out that Microsoft provides a virtual CD-ROM driver for Windows. If you're the type that is weary of third-party software, you can get the Microsoft driver from here.

Daemon Tools is one of the best known applications for accomplishing this. They have a Lite version available, which is free to download. You can download it from http://www.disk-tools.com/download/daemon. To start, download and install Daemon Tools Lite. You'll have to restart your computer during the process since the software has to install a new virtual hardware device.

Once Daemon Tools is installed, you can then run it. The icon will appear on your taskbar by the clock. You will also notice a new CD/DVD drive installed if you open up My Computer. That is your new virtual CD/DVD drive. It can be used to mount disk images, such as .iso, .nrg, .bin/.cue, .ccd, .cdi, and .mds files. There are others as well. Some of the types are normally proprietary and you'd need to have paid for the software in order to use them, so this allows you to use those files for free.

Assuming you have an image file that is of a type that Daemon Tools supports, it's really easy to use. Just right-click the Daemon Tools icons, go up to Virtual CD/DVD-ROM.

Now go over to Device 0, then choose Mount Image. 

From there, select the image file you'd like to use, and that's it. Daemon Tools will mount your image file and you can then use it as if you had put an actual CD or DVD into your CD/DVD drive on the computer.