I would just like to add to my comment #24:
I did a fresh install of Kubuntu Karmic yesterday, with similar FS setup (/ on 
LVM, swap and /home on dm-crypt+LVM) and everything seems to work now as it 
should! I get asked for prompt, if I enter passphrase, boot continues 
immediately. If I leave the passphrase prompt, if stays and not "Recovery 
Console" messages are printed, which I think is OK.
I suspect it was some leftover file on my system that have caused this 
behavior. My system was upgraded from jaunty and was also using test boot ppa.
For me, this issue can be closed.

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mountall 0.2.5 and cryptsetup fail to boot when using usplash
https://bugs.launchpad.net/bugs/456274
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