Comment 3 for bug 585731

Workaround:

Wait until you get the error, then go to tty4 (alt+f4) where you see the error log. It says:

Cannot find /lib/modules/2.6.32-21-generic

Then go to tty2 (alt+f2), press enter to get a root shell and run this command

~# cp -a /lib/modules/2.6.32-21-generic/ /target/lib/modules/2.6.32-21-generic/

I guess setting up initramfs-tools is not running in the current system, but in a chrooted one.