Hello. I am a complete newbie with Sabayon, I am trying to install it for the first time, and I am having the exact same problem. Except that I think I have a pretty good idea what the problem is.
I don't have a CD/DVD drive. I just have a netbook. I just have one USB memory stick, it's 8 GB and it contains many other Linux distro live CD images, including important system rescue distros. They are all managed by something called MultiBoot ISOs, recently renamed to Yumi. Since I need that one USB memory stick and the several distros in it, I cannot use Unetbootin, because MultiBoot ISOs relies on Grub and Unetbootin will change the boot sector on the memory stick and kill Grub. I am stuck with MultiBoot ISOs for my multiple booting needs.
Just a few distros work with MultiBoot ISOs, and that's because MultiBoot ISOs hacks them. It extracts files from their corresponding ISO files and puts them in a directory and changes menu.1st accordingly so Grub will boot them. Unfortunately, there are only so many distros that MultiBoot ISOs will hack and make work. Neither Sabayon nor Gentoo is in the list of supported distros. MultiBoot ISOs offers the option to boot from a regular, unchanged ISO, but that never works quite as expected. The result is always the same: the installer or boot mechanism or whatever absolutely expects to be on a CD. No one has ever told the poor, helpless thing that it could be booting from a USB stick. So the mindless creature looks every which way, can't find a CD and promptly panics, throws a fit, gives up. I have seen that happen many times.
In fact, I have seen that happen with Unetbootin too, a few times, so Unetbootin would probably not help either in this case.
The only distro I have seen that is truly fluent in multiple boot possibilities is Puppy. CD, DVD, USB, external drive, network, floppies, you name it. That thing is made to boot off anything, I suppose. You may have to add parameters to the boot command line, but it absolutely works.
I've never seen another distro that was quite as smart, though. All the other distros are short sighted, they kind of live in a distant past when booting from USB devices was pretty much an eccentricity that only early adopters would put in practice. They do not even contemplate the idea of booting off different kinds of media. CD, CD, CD, ok - DVD! is all they care about. Some will provide an .IMG file instead of .ISO that can be written to a memory stick with 'dd'. But then it's usually a very small, reduced version that tends to leave out "unimportant" things such as a minimal graphical environment or... wireless network drivers. Yes, wireless network drivers are way too big, can't cram them in (sarcasm). Success with those varies. The one distributed with PC-BSD, for example, simply does not work. The worst case I've run into is NetBSD: they just point to some script that someone, somewhere (not them) has made available that will turn the standard NetBSD distribution directory into a bootable USB image. With just one minor glitch: the script only works on NetBSD! You have to have NetBSD already in order to be able to install NetBSD... facepalm!
Meanwhile, many other distros just work with Unetbootin and consider the matter solved. That's how I installed Ubuntu, for example, and the entire experience was 100% identical to that of a CD-based installation. Sweet sweetness.
There are kludges around this annoying and rather uncivil attitude towards USB devices. For example, with Slackware, Arch, FreeBSD and NetBSD, I have managed to boot and do quite a lot until the moment comes to copy/install the software to the hard disk: I either tell the installer to look for the installation payload somewhere inside the USB device or mount some other partition that contains the installation payload and tell the installer to get the installation payload from there. It works quite nicely.
I have been unable to pull that trick off on Sabayon, though. I can't seem to find the presence of the USB memory stick anywhere (I get an identical error message to that parad9gm is getting), and supposing I could mount another partition with the necessary data, I have no idea how to tell Sabayon to quit whining, and just use that because that's what we have, mmkay?
Which reminds me, I have that same problem with System Rescue CD. And it's based on Gentoo, is it not? Isn't that a surprising coincidence...
Like I said, Slackware, Arch, FreeBSD and NetBSD go as far as booting completely. They will not complain until it's time to copy/install packages to the hard disk, and even then, they will tell me quite frankly that they are willing to accept alternatives if I can offer any. Gentoo/SRCD/Sabayon are not willing to take alternatives. They halt in their track like an old, stubborn mule.
What to do then? Well, ideally, this whole Gentoo/Sabayon CD booting mechanism should be rewritten so it is smarter and realizes that it's 2011, just four years until we finally get our flying cars, and that lots of quirky people these days are bent on booting their computers off of USB devices. Those are absolutely great by the way, they are really small and fast, and did I mention convenient? You really should give them a try one of these days. Or, if that is not possible, please tell us what incantation we can type in and execute after falling back to 'shell' that will make Sabayon say OOOOHHH! DUH! and, well... boot.
Thank you for your attention.