I own one of these (Elbox) 4xEIDE interfaces and use it in my untowered A1200. You can happily retain your 2.5" HD though I found I had to have mine only half sitting in the cradle as otherwise ther's not enough room for the cable. There's plenty of space to this in the A1200 though, especially if you remove the small piece of shielding there.
I have a CD drive and Zip drive strung out the side. I found the best way to modify the case was just to file away the 'lip' on the bottom half of the A1200 casing, and thus the IDE cable can emerge from the join between the top and bottom halves of the casing. Looks nice and tidy and best of all there's no obvious gaping holes left behind should you decide to remove at a later date.
Connect your 2.5" HD to the Primary Master Port (40 pin), and a standard IDE cable to the Secondary Master Port (44 pin). As IDE cables can connect two devices (Master and Slave) this means you can hook up a CD Rom drive and something else without having open up the A1200 to do it.
The only issue you will have is how to get power to whatever drives you use on this. Finding IDE/Atapi CD drives with their own power supply is not easy. I managed to find an old 5 1/4" case that came with it's own power supply, which I put my CD Rom in.
The Elbox 4xEIDE'99 interface is worth getting as it should come packaged with Allegro CDFS which is a wickedly fast CD filesystem, much faster than any those that come with any with AmigaOS3.x.