The bug is actually in update-initramfs, not mkinitramfs. I verified the bug and removing the double-quotation marks around ${OPTS} does correct the problem. With the double quotes around ${OPTS}, passing the -v option to update-initramfs produces the following output:
$sudo update-initramfs -k `uname -r` -u -v update-initramfs: Generating /boot/initrd.img-2.6.17-10-generic /usr/sbin/mkinitramfs: invalid option -- /usr/sbin/mkinitramfs: invalid option -- - Terminating... mkinitramfs failed for /boot/initrd.img-2.6.17-10-generic -- mkinitramfs has a buggy verbose mode https://launchpad.net/bugs/62643 -- ubuntu-bugs mailing list ubuntu-bugs@lists.ubuntu.com https://lists.ubuntu.com/mailman/listinfo/ubuntu-bugs