On my W2K system, in order to burn an iso with nero to create a CD that is bootable, after it starts you kill the 'new compilation' dialogue, go to the 'file' menu and select 'burn image' there. And then when it asks you for the .nrg file, just ignore that and use the .iso filename.
Assuming, of course, you aren't talking about using a boot floppy if your CD drive is not bootable via a BIOS setting.
What are the exact steps you are using? Do you have nero available on a windows machine? Etc..??
Also, just for your info, this thread probably should have been in the Linux - Newbie forum, or the Linux - General Forum.
Linux from Scratch is a project thing, http://www.linuxfromscratch.org