So there are a variety of different mechanisms published on the Net that describe how to create an ISO image from an existing folder structure on an OS X box, including the "dd" command and the "hdiutil makehybrid" command.
I wanted to create a DVD movie ISO file from an existing folder structure containing VIDEO_TS and AUDIO_TS folders.
Unfortunately when running the "hdiutil makehybrid" command on the Apple TV box, I get the error: hdiutil: makehybrid: failed to create track
I found an alternative that definitely works on the Apple TV; download HELIOS Software GmbH "mkisofs"
HELIOS Tools: /HELIOS mkisofs/macosx86
The file size of mkisofs (contained in the download zip) that I obtained was 1,509,140 bytes.
-bash-2.05b$ mkisofs -version
mkisofs 2.01.01a22helios0.14 (i386-apple-macosx8.8.1)
Here is how I created a simple iso file from the movie Australia.
~/mkisofs -v -dvd-video -no-hfs -iso-level 4 -nolimit-pathtables --heliosutf8 -o /path/to/dest/australia.iso /path/to/source/Australia_Movie
where /path/to/source/Australia_Movie is the source parent folder containing AUDIO_TS and VIDEO_TS subfolders,
and /path/to/dest/australia.iso is the destination iso file.
I decided to use the "-no-hfs" option, to omit HFS disk image creation; as this was just a plain movie.
XBMC was able to open the resulting .ISO file without issue.