Normally, you use an iso image to burn a CD and install from the CD (you may need t change some BIOS settings to place the CD drive ahead of the hard drive in the boot order). It
is possible to mount an iso image as a filesystem and install from there, but it's a bit trickier; most people opt to burn one or more CDs and install that way. Check out
www.linuxiso.org for some good info on burning CDs from iso files.
You can choose where to install Linux -- either over another O/S or in free space on your disk(s). The installation will handle any formatting required.
Hope this helps.