I can confirm that using a clean install from hardy-alternate-alpha-3-i386.iso 
as host OS fixes the problem(s) mentioned above.
7.10 boots, installs, and runs cleanly (without the cdrom detection problem and 
without problems with ata_piix).

To summarize:

1) Recompiling a custom kernel for the host OS from linux-source-2.6.22-14.47 
(which includes the patch mentioned in comment 7) did not help in my case.
2) Juggling kernel modules at various stages of the boot and install process 
(comments 16 to 18) never really worked for me. Quite likely my fault - it 
should be possible from what I read in the various problem reports.

It appears to me that the source of my problems are fairly well
understood and documented here and in the bugs and mails referenced. And
they are fixed in Hardy.

Although I do not need the latest bells and whistles, I will continue my
test based on Hardy as host OS. Unfortunately I do not think I
personally can contribute directly to a fix on 7.10 (and April is not
that far off, so maybe it is not worth the effort).

Thank You for Your patience and effort in illuminating this problem, and
pinpointing the root cause.

-- 
kvm can not boot Ubuntu guest
https://bugs.launchpad.net/bugs/183485
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