I encountered something like this as well. I used a fresh from the box
4gb drive, went to Create a USB startup disk, tried to install xubuntu
8.1 on it. However, I received a message like Adam Niedling -"non-system
disc," etc and not the grub 17 error.

What worked was reformatting to fat32, partitioning the drive and then
doing Create a USB startup disc.

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"Create a USB startup disk" does not create bootable USB sticks - GRUB Error 17
https://bugs.launchpad.net/bugs/285713
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