This is a known issue and a fix has been developed and uploaded to ltsp-trunk.
I'm waiting for a couple of other fixes, then I'll make a new bugfix release
and get that into the archive.
** Changed in: ltsp (Ubuntu Karmic)
Status: New => Fix Committed
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ltsp doesn't boot due to mount errors in initrd
https://bugs.launchpad.net/bugs/435228
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