I see the same problem.  Even just adding "set gfxpayload=640x480", i.e.
setting it to the same as the default resolution, is enough to reproduce
the blinking cursor in the upper-left corner.  I have an Intel 965
Express Chipset video device, in a Compaq 6910p laptop.  Karmic is being
booted under a VirtualBox-3.1.0 VM on a Windows XP host.

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Unable to enable framebuffer modes with grub 2
https://bugs.launchpad.net/bugs/428519
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