Finally found the solution here:
http://ubuntuforums.org/showthread.php?t=810205

Apparently this is a "known bug" when installing Grub on an ext3
partition. Tonight I tried installing on ext2 and it worked. I am glad I
got it working but also disappointed about such a showstopping bug
existing in this distribution and the time it took for me to find a
solution. So far I haven't found a bugfix in progress for this issue.

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GRUB fails to install in Ubuntu 8.04
https://bugs.launchpad.net/bugs/224134
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