1. kvm-img create hda.img 4G
2. kvm -hda hda.img -cdrom jaunty-desktop-i386.iso -m 512
3. Install Ubuntu onto hda
4. Reboot, following the prompts (press enter to "eject" the CD)
5. System boots into installed OS.

It's the use of '-boot d' that is creating problems for you.  By
default, the order= parameter of boot is set to 'cad' which means that
it will first boot from the first hard disk, then boot from floppy, then
boot from CD-ROM.  This seems to be the behavior you're asking for.

Additionally, you mentioned a user choosing a different device from the
menu.  That is possible by adding '-boot menu=on'.  This will cause a
prompt to the user to hit F12 to change the default boot order.  We set
'menu=off' by default because it introduces a small delay during boot up
which is considered undesirable by many users.

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