Later I found an unused 40GB USB hard drive and installed OS2008.11 on it, this 
time I used the whole disk and it worked.

So there are two issues here:
1. I remember I saw an open bug somewhere that when installing OS on a 
partition instead of the whole disk ( USB disk??) GRUB is not installed. Gotta 
dig out that bug.
2. Even with a manual installgrub the OS would not boot. Issue still seems to 
be in grub, maybe stage 2 but there is no easy way of debugging it.
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