After playing with this some more, I managed to find a workaround.

Clue clue is the log line:

ipconfig: /sys/class/net/eth0: SIOCGIFINDEX: No such device

Which indicates that the DEVICE variable is somehow getting changed from
eth0 (as set in the initramfs.conf) to /sys/class/net/eth0, which is
garbage.

I haven't worked out exactly where this gets screwed up, but if you set
your grub command to explicitly pass in ip like:

ip=:::::eth0:dhcp

This seems to take a different branch in configure_networks() that
correctly configures the interface.

Leaving ip unset or doing ip=dhcp results in the reported failure.

-- 
10.04 beta1 iSCSI-on-root fails on boot
https://bugs.launchpad.net/bugs/546964
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