I can confirm that behavior, though I'm using virt-manager.

I create a new virtual machine with "install from CD" option, it will boot with
kvm -hda hda.img -cdrom jaunty-desktop-i386.iso -m 512
for a one-time CD boot and then it will default to -boot c on subsequent 
reboots, somehow hiding the issue.

Reusing that created VM for more ISO testing by selecting "CDROM" in boot 
options will make it boot with
kvm -hda hda.img -cdrom jaunty-desktop-i386.iso -m 512 -boot d
and then at the end of the install after rebooting I get the "No bootable 
device" error, I need to switch back Boot options to "Hard disk" to boot from 
the hard drive, or stop/restart the VM to boot from the CD again.

My guess is that KVM obeys the ejection of the CD by marking the drive
as open. Rebooting it doesn't virtually close the drive, and I suspect
failure code 0003 to translate to "CD tray open". Restarting kvm
completely clears the CD tray status and then it obeys whatever is in
"-boot".

This is confusing since we don't have any way of closing that drive...
and "real" machines usually close the drive bay on reboots. The behavior
is comparable to a machine with slot-in drive and BIOS boot set to
"CDROM only". It will spit out the disk and have no bootable device
until you point the BIOS to the Hard Drive or push the CD back in.

-- 
Fails to boot from CD after reboot: CDROM boot failure code: 0003
https://bugs.launchpad.net/bugs/348633
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