The Mooby2 plugin reads ISOs but looks like a CDROM to emulators (it's a CDR plugin). It will compress your ISOs and read compressed ones. I don't know if the built-in ISO support in ePSXe will read compressed ISOs or not, nor do I know for the other emulators.
What I do instead is use the compressed folders feature of Windows XP (also present in Windows 2000) to store the ISOs in a place where the operating system will compress them for me. To use this feature, in Windows Explorer (not Internet Explorer) right-click on the folder where you're going to put the ISO (or already have it), choose Properties, then on the General tab click the Advanced button. On the resulting box check "Compress this folder's contents to save disk space", and OK your way out of everything. All the files in that folder and subfolders will get compressed, and anything you put in that folder from then on will also get compressed.
If you use that feature, you might not get as good compression as with the Mooby2 plugin, but you're guaranteed that that ISO will work no matter how you use it - directly, through Mooby2, as a virtual CD drive, whatever.
Dan