.ISO files are images of a file structure and some other bootable DVD goodies - depending upon what is all packaged up in the ISO. Think of it as a folder/file tree in an uncompressed .ZIP container. When you burn the .ISO to a blank DVD, that file system and certain DVD bootable bits are applied and made the DVD ready to use.
Win XP or Win7 are using different file associations for what .ISO means to them... Same stuff in the .ISO, just silly Windows tricks.