I would say ISO, because it's reading off your hard drive....this is much faster and you won't have to wait if you drive takes a long time to spin back up...also if you are on a laptop, it uses much less power...I might even go as far to say it's more stable...
ISO, for some of the reasons mentioned above. I'll go more in depth though .
CD-ROM: 300 KB/sec (2x, real PSX speed)-8,400 KB/sec (56x)
WD800JB (my main hard drive ): ~34,000-63,000 KB/sec
CD-ROM: 75-160 ms
Average 7200 RPM HDD: 10-15 ms
Also, some CD-ROM drives don't like reading subchannels and some don't like reading PSX discs at all; ISOs have neither of those issues. As for the CD-ROM spinup issue, just use Nero DriveSpeed and set the spindown time to infinite or 32 minutes.
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