Not to go and jump on anything but you can use alcohol 120% for completely legit purposes, just because many people do not should not justify a simple "here let me point out rule number one".
Say I burn a DVD of my family get together. I can go back and rip an image of that disc into an .mdf / .mds file. Then go and burn said copies. Why, I dont know. But that doesn't make doing it illegal, and doesn't justify assuming what he is doing isn't legit. Just my opinion.
.MDF and .MDS are alcohol's default cd image file formats. If its not recognizing the .mdf that your selecting, then try the .mds. I haven't used that program in a long time so can't tell you why its giving you that message. But I would try selecting the .mds file, because that is the catalog file that "points" towards the data packed into the .mdf. Hope that helped some.
And if what your doing isn't legit, no one wants to hear about. But I'm not going to assume. I'll just leave you with this. "Go support the software companies that bring you the programs/games/data/video you may be making a backup of!" hehe