In the default installation of Ubuntu Server (Gutsy Gibbon), the default source of packages is the CD-ROM drive.  That's fine if you make the assumption that there will always be somebody physically present in order to maintain the servers, but for most server's these days, that's a fallacious assumption.  The really bad part about this default, is that there's no way I know of at the time of this writing to override this on the update command.  In our company, we have our servers hosted off-site like so many other companies, so everything must be done remotely.  Therefore, the CD-ROM as a source for Ubuntu packages is a bad idea.  To remedy this, you have to go into the apt-get configuration stored at 
/etc/apt/sources.list
, and you'll have to find a line similar to :
deb cdrom:[Ubuntu-Server 7.10 _Gutsy Gibbon_ - Release i386 (20071016)]/ gutsy main restricted
Comment out this line, try your update again and you should be good to go.
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