I have been told, and perhaps it was bad information, that it is possible to set linux up so that is sits quietly in a folder on a drive and no entries or changes are made to the MBR so if you want to boot to the linux OS you boot the system from a CD and from there it will load the linux OS.
What do you mean by "sits quietly in a folder". There are some distros that can run from a DOS filesystem. However, most require a linux partition and a linux filesystem. Also most require at least two partitions i.e. /(root) and a swap. If you have a ton of memory and are not running any intensive memory apps you may not need swap.
I would say that you can not create a boot CD because the installer does not have anyway write to CD and thus no option is presented.
Create a boot floppy and then you can burn a CD using that floppy image. I do not know the process using linux (I use Roxio EZCD creator).
You can have windows boot linux if you do not want to install a linux boot loader to the MBR. If you do not have a floppy drive this may be your best option.
Another option would be a live CD distro like Knoppix. They do not need any hard drive space. The essential filesystems are run from RAM. The disadvantage is you can not install any new apps without rebuilding the CD. You can save configuration changes to a floppy or hard drive.