When you are performing an:

sudo apt-get update

You are prompted for the Ubuntu CD:

Do you want to continue [Y/n]? y
Media change: please insert the disc labeled
‘Ubuntu-Server 7.10 _Gutsy Gibbon_ – Release i386 (20071016)’
in the drive ‘/cdrom/’ and press enter

To get around this, go into your sources list:

sudo joe /etc/apt/sources.list

and look for the line at the top:

deb cdrom:[Ubuntu-Server 7.10 _Gutsy Gibbon_ - Release i386 (20071016)]/ gutsy main restricted

and comment this out:

#deb cdrom:[Ubuntu-Server 7.10 _Gutsy Gibbon_ - Release i386 (20071016)]/ gutsy main restricted

Rerunning:

sudo apt-get update

will now download the sources, instead of trying to get them from a CD.