I also experienced this error using a Kingston 8GB USB flash-drive. I was 
attempting to update my Xubuntu install on the flash-drive.
I was following the directions listed from the link below to install to the 
flash-drive. I then booted from the usb stick, and proceeded to use update 
manager to install the latest updates when I encountered the error.

http://www.pendrivelinux.com/2008/11/05/usb-xubuntu-810-persistent-
install-windows/

Errors were encountered while processing:
 linux-image-2.6.27-7-generic
E: Sub-process /usr/bin/dpkg returned an error code (1)
A package failed to install.  Trying to recover:
Setting up linux-image-2.6.27-7-generic (2.6.27-7.16) ...
Running depmod.
update-initramfs is disabled since running on a live CD
Failed to symbolic-link /boot/initrd.img-2.6.27-7-generic to initrd.img.
dpkg: error processing linux-image-2.6.27-7-generic (--configure):
 subprocess post-installation script returned error exit status 17
Errors were encountered while processing:
 linux-image-2.6.27-7-generic

-- 
package linux-image-2.6.27-7-generic 2.6.27-7.16 failed to install/upgrade: 
subprocess post-installation script returned error exit status 17
https://bugs.launchpad.net/bugs/296614
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