I'm not sure if this has been solved, but I have the same problem.

When installing 8.04.1 server LTS from a USB stick on a brand new machine that
does not have a CDROM, the installation fails at CDROM detection. 

SOLUTION:

Get a shell (ALT+F2) and enter:

$ mount -t vfat <your_usb_stick_device> /cdrom

and the installation will continue. In my case, it stopped again saying that 
the 
cdrom could not be read properly. Looking at the output on the ALT+F4 screen,
there was a message like:

/cdrom/dists/stable/Release

was not found... Serious bug... There ain't no 'stable' directory, but only one
called 'hardy'... Tried to link hardy->stable, but it did not work (vfat file 
system).
So I just copied the entire tree:

$ cp -pR /cdrom/dists/hardy /cdrom/dists/stable

And the installation continues smoothly 'till the end.

-- 
Installer does not properly detect USB CDROM
https://bugs.launchpad.net/bugs/104113
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