Comment 1 for bug 410653

I can confirm this happens on grub-pc 1.97~beta4-1ubuntu4 as well.
This time background_image returns the error: "error: No video mode activated".

This bug has been previously reported on Debian, but marked as fixed: http://bugs.debian.org/cgi-bin/bugreport.cgi?bug=522128 Clearly it hasn't been fixed yet - or at least not in Ubuntu.