Is there a way to burn into a virtual CD-R instead of burning into a real one?
While you can write data to a .iso file in Disk Utility, I don't believe there's any way to do so with the burning functionality built in to iTunes.

You could however get a program like Virtual CD-RW, which presents itself as a CD-RW drive to the OS, which iTunes could then burn to. The reviews for that program don't look great, so I'd suggest getting the demo version and seeing if it works for you before paying any money.

Roxio's Toast Titanium may include similar functionality, but I couldn't find any definite confirmation of that on their site.