They could sell the image. Cheaper, with instructions for burning and/or mounting.
It's not that uncommon for a free release to come on an iso, might as well do a commercial one if there's no other way. Third party fix needed? Yep, just like DOSBox or ScummVM.

They could but no self respecting DD service would accept it so they would have to set up their own and I doubt it would be worth it just for one game no matter how huge cult classic it is. In order for game to be sold on DD service it must be installable and runable by mainstream (technically inept) people as well (only pirates use them anyway right ;-p).

They could include Daemon Tools with the installer like they do with DOSBox, and the game could run as a shortcut to a .bat file, which mounts the iso as a command. Though I'm not sure it that could even work.

Some of ye olde indies offer the same option. I've seen bands selling their music like that via mail, too. No everyone wants to order an industrial scale production run.

It is not shady at all, they made the game and they are allowed to do that. All it means is that they will print a copy of the game specifically for you when you order it, rather than there being a mass produced version of it.
And as you can see, I'm not from the US either ;)