Or if you have alcohol 120% or less you can use those to run those types of files. Dameon works very well though and it's free. also some files like the .cdi for dreamcast games require dameon tools 3.29 so if you wana run more than one emulator i suggest getting 3.29 instead of the newest ones. That way you can play psx playstation and anything else your heart desires without a cd-rom!... like on my laptop!
Daemon Tools creates a virtual DVD-ROM drive on your computer. MDF/MDS files are CD images created with Alcohol 120%. You can use Daemon Tools to "mount" the disc image into the virtual drive, then configure ePSXe to run games off that virtual drive as if it were a CD-ROM.