Fun, this seems to be related to t1.micro vs m1.large (and maybe
larger). I am able to successfully replace the kernel on a m1.large. But
the t1.micro is, as you say, not even bothering updating the console
messages. And you said kvm boots fine. Was that with just a single vcpu?

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natty kernel fails to mount root on ec2
https://bugs.launchpad.net/bugs/669496
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