ah so you're claiming something like this would
work out of the box:
 label ubuntu1104
 kernel memdisk
 append iso initrd=ubuntu.iso 
This is one entry from my multiboot USB drive's
GRUB menu:
title Ubuntu Netinstall x86
find --set-root /iso/ubuntunetinstall.iso.gz
map --mem /iso/ubuntunetinstall.iso.gz (hd32)
map --hook
chainloader (hd32)
  To my knowledge, Linux ISO booting consisted of
 [A] booting kernel
 [B] processing INITRD
 [C] mounting CD/DVD/BluRay, or ISO
 [D] continuing. 
This is another entry in my menu.lst:
title Kubuntu 10.04
find --set-root /iso/kubuntu-10.04-desktop-i386.iso
map /iso/kubuntu-10.04-desktop-i386.iso (0xff)
map --hook
root (0xff)
kernel /casper/vmlinuz file=/cdrom/preseed/kubuntu.seed boot=casper
persistent iso-scan/filename=/iso/kubuntu-10.04-desktop-i386.iso splash
initrd /casper/initrd.lz
Both boot methods work just fine.
  What I mean is only doing C and D, everything has to
be self-contained
 in 1 single file
 For DOS this goes fine as it doesn't enter protected mode. 
Not entirely true.
This is another of the entries in my list:
title FreeDOS Balder Floppy
map --mem /iso/balder10.img.gz (fd0)
map (hd1) (hd0)
map (hd0) (hd1)
map --hook
chainloader --force (fd0)+1
rootnoverify (fd0)
This works fine, as long as I don't boot with HIMEM.