I've been experimenting with the mkisofs tool to make bootable ISO images for burning onto CD. This tool can be downloaded from the CDRTOOLS site (make sure you use the latest *stable* release).
The command line I'm using is:
mkisofs.exe -J -N -l -v -relaxed-filenames -b Floppy.img -volid "BootCD" -o "BootCD.iso" CDfiles
...where "CDfiles" is the name of a folder containing the floppy disk image (named "Floppy.img") as well as anything else you want to put onto the CD-ROM. I'm doing this from a command prompt in Windows 7 and it seems to work very well.
To make the CD bootable I've been using my bootable floppy image. This causes the CD-ROM to boot as if it were a floppy disk. You'll see the files inside the disk image appear as if it were a real floppy drive when the CD boots up. I've included the the generic CD-ROM drivers, and you should see the actual CD-ROM appear as drive X:.
You'll also get a 10Mb RAM drive, giving you some *writable* disk space to play with. This version simply boots to a basic DR-DOS system, but I'm blogging it since it may come in handy for other purposes...
You can burn the resulting ISO image to a CD, or simply try it out by attaching the ISO in Virtual PC or VirtualBox and booting from it. Here is a screenshot of the ISO booted in Virtual PC: