Here it is: GDEMU – Revive your Dreamcast
Read that blog and you will find all answer at your possible questions. Also there is a video showing hot it works and it do works!

GDEMU is an SD card based replacement for the optical drive in Dreamcast console.
Features:

100% compatibility with existing software
No need for custom BIOS or other modifications
Full support for CD Digital Audio
Considerably faster loading times

GDEMU is compatbile with VA1 model Dreamcasts from all regions

Supported memory cards:

SD: 512MB, 1GB, 2GB
SDHC: 4GB, 8GB, 16GB, 32GB

Supported filesystems:

FAT (also known as FAT16)
FAT32


Supported image types:

GDI for GD-ROMs
CDI for MIL-CDs and bootable homebrew apps
ISO (as data carriers for homebrew)
Version showing GDEMU v4 (v5 will be for sale) :
[youtubenew]http://youtu.be/f9Ckoob2-Yo[/youtubenew]