One of the things I was very pleased to see in the Windows 7 pre-beta is that .ISO files have a file association. Right clicking an ISO file shows you that the default action is to burn the ISO to a disc.
I burned off an Office 2007 CD using this - just to see if it works - and it did work a treat.
It is certainly good that support for ISO files has finally made it into the OS and I have to say it is about time. Especially when you consider that Microsoft distributes a massive amount of software as .ISO files through the MSDN and TechNet subscriptions.
Unfortunately the support simply does not go far enough. It is simply not safe to assume that everyone has a blank CD or DVD lying around. It is not even safe to assume that they have a burner. Many mobile devices don't have an optical drive. What really needs to be added in to Windows is the ability to mount and ISO image. Until Microsoft sorts this out you will need to continue to use 3rd party software like Slysoft's Virtual CloneDrive (which is great freeware) to mount ISOs.