Need help with small AppleScript
Every do shell script command starts a new shell, so the cd doesn't have any impact on the following command. So you would be better of with running

tell application "Terminal"
    activate
    do shell script "cd ~/Desktop/Quake3ISO &amp;&amp; hdiutil mount ~/Desktop/Quake3ISO/Quake\\ 3\\ Arena.iso"
    delay 5
    do shell script "cd ~/Desktop/Quake3ISO/quake3 &amp;&amp; wine ~/Desktop/Quake3ISO/quake3/quake3.exe"
end tell