While initially searching for this topic, this thread came at top of google search. Having figured out a way to boot DSL using grub2 from an ISO successfully, I thought I share it here for benefit of others (and OP if still relevant) who may be looking for this.
I wrote a shell script which extracts the ramdisk image inside the DSL .iso file and patches it so it can loop mount the .iso file on boot. The script is at https://gist.github.com/2041319
You also need cloop-decompress which is at https://gist.github.com/2040285
There is an example as a comment in the shell script. Good luck!