Sounds like you didn't mount your CD-Rom drive. Here's what I suggest:
1. Remove that copy of TFTD from your games directory.
2. Add the following line to your DOSBox autoexec:
mount D E:\ -t cdrom
This will mount your CD-Rom drive (based on contents of the error, I assumed it uses letter E in Windows) as drive D in DOSBox.
3. Install the game again. Remember to configure the sound correctly (Sound Blaster - newest type there is in the setup, IRQ 7, DMA 1, Adress 220)
Regarding images, if you record an ISO image of the CD to your hard drive, you can mount it as if it was an actual drive by using
imgmount D [path to the ISO] -t iso.
Wikipedia has
a list of software that supports this format