Comment 2 for bug 298292

I noticed the following in your VarLogDistupgradeTermlog.gz:

 Conflicts found! Please edit `/var/run/grub/menu.lst' and sort them out manually.
 The file `/var/run/grub/menu.lst.ucf-new' has a record of the failed merge of the configuration file.
User postinst hook script [/sbin/update-grub] exited with value 3
dpkg: error processing linux-image-2.6.27-8-generic (--configure):
 subprocess post-installation script returned error exit status 3
dpkg: dependency problems prevent configuration of linux-restricted-modules-2.6.27-8-generic:
 linux-restricted-modules-2.6.27-8-generic depends on linux-image-2.6.27-8-generic; however:
  Package linux-image-2.6.27-8-generic is not configured yet.
dpkg: error processing linux-restricted-modules-2.6.27-8-generic (--configure):
 dependency problems - leaving unconfigured

Have you modified the /boot/grub/menu.lst file? What does '/var/run/grub/menu.lst' and '/var/run/grub/menu.lst.ucf-new' show (ie can you attach them?).