Don't know what you're doing wrong. I have Daemon Tools 4.11.1 and are playing games on SSF 009 Beta R2. Works just fine.
1. I start SSF. Wait until the Bios has loaded.
2. Push CD Open in the Hardware menu.
3. Load a game into Daemon tools.
4. Push CD Close in the Hardware menu.
5. Wait for Saturn Bios to recognise it and then select Start Application in Bios menu.
Couldn't be simpler. (Well, not MUCH simpler anyway)...
If you check Option menu. Where it says CD Drive on the Peripherals page, You should be able to select your Daemon tools DVD or your regular (+ any other CD/DVD you may have installed). Otherwise. try to reinstall SSF.