This is where I ran into issues and had trouble with my setup. (I was trying to extract an .iso file from MAME's CHD, but it didn't work). When you set up your drive in the SCSI2SD software, make CERTAIN that you set the device ID to 1, and that the "parity enabled" is checked. My CPS3 board wouldn't even recognize the adapter until I updated that information.
The CD needs to be 'cloned' onto the SD card. I use WinHex and do the "clone drive" command to clone the file to the SD card. Although the full WinHex isn't free, with so many other things it allows you to do, I think it was worth the purchase. Of course, there are other "less than ethical" ways to get a full functioning WinHex. Heh.