Tried with the kernel below from http://kernel.ubuntu.com/~kernel-
ppa/mainline/daily/current/ same problem.

$ uname -a
Linux VPCCW1FFXL 2.6.34-999-generic #201003271003 SMP Sat Mar 27 10:10:21 UTC 
2010 x86_64 GNU/Linux

Also figured this workaround to regain sound on the incorrectly muted session:
- Click the audio icon on the notification area
- Click "Mute All"
- Click the audio icon on the notification area
- Click "Unmute"

** Tags removed: needs-test-current-image

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[Realtek ALC262] Audio remains mutted when switching users
https://bugs.launchpad.net/bugs/543959
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