I found it really easy just to install the updated driver from ralink.
Here are my steps thanks to post #25:

First download the new driver from ralink:

http://bit.ly/bpzQRQ

While you still have inter-tubes access, make sure you install build-
essential so you can compile the driver

sudo apt-get install build-essential

Next untar it somewhere in your home dir.

edit this file in the folder you just untared ./os/linux/config.mk and make it 
look like this:
(I found this step necessary. I tested it without these changes and it still 
fails to connect)

HAS_WPA_SUPPLICANT=y
...
...
HAS_NATIVE_WPA_SUPPLICANT_SUPPORT=y


turn off your wifi card

sudo ifconfig <ra0, eth1, wlan0> down

unload the kernel module

sudo rmmod rt2860sta

rename the old module in:
(this is done *just in case* AFAICT)

 /lib/modules/2.6.*/kernel/drivers/staging/rt2860/ from <filename>.ko to
<filename>.ko_old

cd into the folder you untared if your not already there

make
sudo make install

sudo depmod -a

now either reboot or load it manually with

sudo modeprobe rt2860sta
sudo ifconfig ra0 up
(my wireless card started out as wlan0 and after the driver update showed up as 
ra0)

If some one knows a way I can turn this into a dkms package and put it
in a ppa, I will gladly do that later this week (after finals)

-- 
[lucid] rt2860 frequently fails to connect to mixed mode WPA/WPA2 secured 
wireless networks
https://bugs.launchpad.net/bugs/496093
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