PS2 ISO files work by mimicking the file system and structure of a physical PS2 game disc. When a PS2 game is ripped to an ISO file, the data is extracted and stored in a single file, which can be compressed or uncompressed. The ISO file contains all the game data, including the executable code, graphics, sound effects, and other assets. When a user wants to play the game, they can mount the ISO file to a virtual drive or extract it to a folder, allowing the game to be played as if it were on a physical disc.