I had the same symptoms with 2.6.26-2 and -3. I installed kvm version 1:62+dfsg-0ubuntu8 from hardy-proposed and did succesfully boot into intrepid VM, kernel 2.6.26-3.
At first sight, unlike Roland Dreier above, no problems with broken X in my VM when starting gdm.
I had the same symptoms with 2.6.26-2 and -3. I installed kvm version 1:62+dfsg-0ubuntu8 from hardy-proposed and did succesfully boot into intrepid VM, kernel 2.6.26-3.
At first sight, unlike Roland Dreier above, no problems with broken X in my VM when starting gdm.