Did you burn it with the proper folder structure like xpa12 cited? You should just have a PS3 folder on the CD, in that an UPDATE folder, in that the update file.
Anyway, you have a PS3 - I would spend a little bit of change and just get a new usb stick.
Do you have an PS3 60 GB console?
Maybe you could use some other storage devices like SD Card and so one..
Following up on what moja said, make sure all the folder names are in "CAPITALS". The first time I tried updating my PS3 from a USB flash drive it took me ages until I read that it all the folders had to be in capitals.