owyone,
It sounds like you are doing it correctly. You would install it from the CD and the program will look to make sure the USB device is in the system before it will run. If it does not find the USB device it will error as you describe.
Please plug the USB device (MUD) into the system and make sure it is recognized. You should be able to look at the files on it and the only light that should be on is the green one. When you first plug it in the green and yellow lights will be on then, when it is initialized the yellow will go out with the green remaining lit.
If this does not happen try another USB port, one on the back attached to the motherboard. If it still does not function it may be defective, please call tech support (866) 289-7237 and request a new MUD be sent to you.
-Fred