There is an actual utility out there to make a live OS X CD. It is called BootCD. http://www.charlessoft.com/ It is compatible upto Panther, but not Tiger. I have used it to make a nice bootable cd that has a few diagnostic utilities, but the best part is I can get to a hard drive on the desktop. It's great for fixing User library problems, recovering files, etc. Only draw back is that it takes about 15 minutes to boot.
Live CDs for the Mac