This bug was fixed in the package lxdm -
0.2.0~svn2307+git20100209-0ubuntu2

---------------
lxdm (0.2.0~svn2307+git20100209-0ubuntu2) lucid; urgency=low

  * debian/patches/15-path-replace.patch : From upstream, don't let lxdm
    replace PATH (LP: #524761).
  * debian/lxdm.upstart: export PATH from /etc/environment.
  * debian/patches/20-stderr_stdout_to_log.patch: From Sidux, redirect stderr
    and stdout to the log file.
 -- Julien Lavergne <[email protected]>   Wed, 24 Feb 2010 23:51:29 +0100

** Changed in: lxdm (Ubuntu)
       Status: In Progress => Fix Released

-- 
/etc/environment not being read in Lucid
https://bugs.launchpad.net/bugs/524761
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