Does Mac OS X allow for the creation of iso files and if so can they then be run on a virtual drive?
The usual format for this on OS X is a disk image (aka .dmg). To create them you can use Disk Utility.app (in /Appications/Utilities):


insert the DVD you want to create the image from
start Disk Utility
select "New Image" from the toolbar and pick the DVD as a source. The .dmg can be stored wherever you want to


To open/use it afterwards, just doubleclick it in Finder.