I use Roxio Easy CD Creator to format and burn Cd's for my digital
photos. I am asked to choose whether to set them to be read and
written as a 'drive letter' which can be opened with drives set up for
Direct CD in which case Standard CD Rom drives will not be able to
read, or as UDF v 1.5, or to close so that any Computer can read. I
have been using the option for Direct CD as that was the initial
setting. What are the implications, in particular, will photoshops be
able to read the images and may friends have a problem opening files?

Burning with the Direct CD option will only allow the CD to be read on
other computers with Roxio Easy CD Creator or with UDF Reader
installed:

http://www.roxio.com/en/support/ecdc/software_updatesv4_2.jhtml;jsessionid=EKA5RFT5WP3LTLAQAMHB3KQ

If you or your friends are accessing the photos with Photoshop on a PC
that contains either of these applications, you should be able to read
the files.  However, if you are using a Mac, a CD burned with Direct
CD will not be readable.

I am not familiar with roxio easy cd creator,
But I know "photos forever!" can save photos to cd or dvd, 
guide is at http://www.topvideopro.com/backup/photo-cd.htm
dvdsanta can burn photo to dvd, guide is at
http://www.topvideopro.com/burn-dvd/photo-album.htm#tutorial

I would look at Picasa.  http://picasa.google.com

It has a built in burning function that may do exactly what you are
looking for.  Also a great photo management/touch-up program.

use somic mydvd so you can watch it on dvd players and computers with a dvd drive