I uploaded a fix for this bug to hardy-proposed a few days ago. It
should get accepted real soon now.. The changelog from there explains
the issue:

kvm (1:62+dfsg-0ubuntu8) hardy-proposed; urgency=low

  * Disable CAP_CLOCKSOURCE. This works around the ABI incompatibility of the
    paravirt clock between Hardy's kernels on the host side and the rest of
    the known universe on the guest side. (LP: #243677) This allows guest
    2.6.26 and onwards kernels with KVM_GUEST enabled to boot.

For SRU purposes:

Impact: kernels with CONFIG_KVM_GUEST enabled will fail in undefined
ways. Mostly failure to boot, but if you're unlucky enough, they'll work
for a while, and then break, fall apart, and possibly cause data
corruption.

In intrepid, the bug is gone, since we have a newer host kernel. In
hardy, the fix in proposed returns false for KVM_CAP_CLOCKSOURCE, so no
guest will ever try to use those capabilities.

Test case: Using kvm, try to boot an intrepid kernel.  It will fail
spectacularly.  With new kvm (1:62+dfsg-0ubuntu8) this should not be the
case.

 subscribe ubuntu-sru

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intrepid kernel 2.6.26-2-generic (amd64) won't boot as kvm guest
https://bugs.launchpad.net/bugs/243677
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