ISOLINUX is a bootloader designed to run off of a CD-ROM, much like LILO or GRUB are designed to boot from a hard drive. But no, it isn't Linux and it isn't an OS, so you'll need an image of the OS somewhere on the CD. Fortunately, there aren't very many magic tricks involved... you just need a mounted root filesystem once the init process is over.
In my case, my requirements are a bit unusual: the user must be able to remove the CD once my system is loaded. Therefore, I just create an ext2 filesystem and use the initrd.img to get it loaded; I never actually transition root afterwards like one usually does. On the other hand, projects like Knoppix use the initrd.img to get enough tools loaded to let them find the CD... then they mount the CD as root and proceed that way.
How much do you know about the Linux boot process? It might be a good idea for you to sit down with mkisofs, a rewritable CD, and a spare machine (or some virtual machine software which will let you test your disc out without requiring you to reboot). First step is to get ISOLINUX to boot, next is to get the root filesystem mounted, next is to get your program to run, etc. etc. You can have your program run automatically on bootup by editing /etc/inittab; that part is pretty easy.
You'll be able to find help with your project on the forums. However, I think you'll find a fair amount of info to start with by Googling "create linux bootable cd" and such variants. Sadly, I wouldn't call the process "easy" (at least not when you're making your own root from scratch). But with enough invested time, effort, and learning, you should be able to do it.
Best of luck!
