Please search the forums. Numerous people have asked on how to boot ISO files from FOG PXE menu and there are heaps of answers and code snippets on how to do this.
In short: Yes it can be done and it is easier if you use the current (unstable) development version of FOG because PXE menu can be configured within the web interface. With FOG 1.2.0 you’ll have to edit a PHP file to do this…