I have exactly the same problem as the initial post.  I attempted to
build kvm-85 and discovered it will only compile for 2.6.29 kernels
(i.e. it will not compile with jaunty kernels).

Building only the kvm-85 userspace results in the same behavior (no
fix).

If this is in fact fixed in kvm-85,  I would suggest the fix be
backported to the jaunty kvm or kvm-source packages as appropriate.
Otherwise, Ubuntu users are locked out of using ubuntu guests with vesa
consoles until karmic is released in six months.

-- 
[jaunty] vesa driver stopped working (no devices found) inside KVM after X 
update
https://bugs.launchpad.net/bugs/356133
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