I'm trying to eliminate optical drives from my systems, and the only snag is some software needs to boot from optical to work properly (operating systems, WHS recovery cd). What I'd like is software ...

Your old PC's apps, settings, and configs don't have to die with the hardware.

The "Bootable" legacy ISO you've used is in fact not bootable, it relies on CDROM emulation provided by BIOS. VMs don't usually do this sort of emulation. If you set the guest OS to something like ...