Nice setup! Yes, you can throw stuff onto a CD and use it that way, but you need to make a special bootable ISO that you then burn to a disc.
This appears to be a decent guide but I haven't tried it.
I think the newer versions of OctaMED need a newer kickstart than 1.3, and that complicates things a little I think because you need to update the CDTV's special ROMs as well as kickstart. I would recommend kickstart 3.1 and whatever additional ROMs the CDTV needs to match that.
The more memory the better really, as samples are played from memory which will run out quickly on that machine. There are modifications around for upgrading the memory, a bit of a search around these forums should turn up a few pointers.
Good luck, and enjoy! Still a lovely looking machine to this day!