You are missing one step. You need software that will mount a virtual CD. The one most of us use is Daemon Tools (as would be suggested by your subject)

http://www.daemon-tools.cc/eng/downloads

You can call the ISO anything you want. You don't necessarily need to install from the .iso either.
Daemon Tools has a 'MOUNT' command which lets you browse for an image to create a virtual drive from.

Works great. I've used it for any number of games. The Lite Version of Daemon Tools (I assume this one is still free) allows you to mount 4 drives simultaneously, but generally I unmount the one I don't need and mount the one I want to use.