Comment 3 for bug 297409

There is a reason why this is being shown. I was getting the same message until I did this.
Once the usb live key is made, open it and go to the directory pool/main/l/linux. Over there sort all the files by their types. You'll notice that there are three files with the extension .ude
rename them with the extension .udeb and installation process will not give the cdrom not detected message anymore.
According to this the installer tries to search for the udeb files and on not encountering them thinks that there is some error.

so i guess if the canonical team rectifies the names in the cd images noone will have this problem.

Note- In my case the installation failed at a later point as well when i tried to install the desktop after installing the base system but that is a seperate issue.
Hope this helped. read this from a forum post by a member last nite. Cheers. srry for being a lil vague. He also said strangely the file extensions are .ude but the installation does not fail when an actual cdrom is used and that it was only for usb method. however i can confirm it solves the problem