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.

-- 
Ubuntu Studio 10.04 Alternate Install Fails
https://bugs.launchpad.net/bugs/585731
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