Use the built-in DVD extraction tool within the dashboard interface.
The rumor is based on a patent filing by Microsoft that mentions "a computer-readable medium comprising a game in a compressed, digital format." While this doesn't necessarily confirm ISO support, it does suggest that Microsoft is exploring ways to enable digital game distribution and playback.
The Xbox 360 console uses specific file types for game data storage.Preservationists and emulation enthusiasts primarily interact with two distinct formats. ISO Images