Buddha,

You need to install grub version 1 if your Karmic install is using
grub2.  VMbuilder will then be able to create an image but the next
problem is the image will not boot unless you manually install grub.
Grub seems to be unable to find the grub stage files.

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VMBuilder doesn't work with grub2
https://bugs.launchpad.net/bugs/410886
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