[Andareed]

Read this ms-kb article: http://support.microsoft.com/kb/314060/en-us

[Development]

Just an addition to clarify the problem (all this is relevant to 2000/XP).
If your virtual or physical device does not appear in Explorer then first go to device manager and check that corresponding CDROM is present there and Windows is using correct drivers for it. Daemon Tools does not provide CDROM drivers - Windows uses its standard Microsoft drivers bundled with OS. There must be at least storprop.dll and cdrom.sys which are mandatory. There may be also redbook.sys and some other filter drivers installed by 3rd party applications. Daemon Tools is only creating virtual SCSI controller with raw CDROM devices on it - but CDROM itself is controlled by Windows, not Daemon. All above mentioned drivers are automatically installed by Windows when you add new virtual or physical devices (eg. external USB CDROM). In this sense virtual drive acts same way any all other CDROMs. In some cases Windows may fail to install drivers, eg. if its catalog database is corrupt or some bad filter driver is preventing it - then you may need to manually select standard driver for it.
If you have all correct drivers installed but CDROM is still not present in Explorer then you should check any filter drivers. You may have severe problems if you have eg. Roxio filter drivers present that are part of Easy CD or Windows Media Player in 2000 - even without Daemon Tools.
Open the
HKLM\SYSTEM\CurrentControlSet\Control\Class\{4D36E 965-E325-11CE-BFC1-08002BE10318} key which controls 'DVD/CD-ROM' class of devices and check 'UpperFilter' and 'LowerFilter' values.
In case of Roxio you may have cdralw2k.sys and cdr4_2k.sys there (cd4_xp.sys in XP). You may have system hangs or BSODs with these drivers in many situations: eg when new devices are added to system (virtual or USB) or some burning application or protected game is run.
You may try to remove unwanted drivers by editing registry - be careful not to touch any other filter driver if any.
These registry values are in fact REG_MULTI_SZ strings. After editing you will need to reboot then you can also delete these files from Windows\System32\Drivers folder.
Do NOT just delete these files without correcting registry first - your CDROMs will not work at all then!
You may have also other filter drivers. Drivers that are known NOT to cause any problems are ElbyCDFL.sys (from Elby or Slysoft) and PFC.SYS (from Padus); so it is unlikely you will need to remove them.
Sometimes the problem is also caused by packet writing software which has bugs and does not handle correctly the dynamical addition/removal of devices in system. In this case you may try to uninstall/reinstall such software.
All above problems are not related to Daemon Tools directly and may happen even with any other PnP device that is added to system on the fly - Windows is complex system and all components must obey certain rules.
If some drivers behave bad - system stability is compromised no matter how good other drivers are.