OK so your problem is unrelated to this bug report; and I also think it's not 
an LTSP bug but a misconfiguration.
Best way to get help in troubleshooting it would be to join the #ltsp 
irc.freenode.net channel, or to ask in the ltsp-discuss mailing list.

IPAPPEND 3 is required in proxyDHCP mode otherwise your clients try to
connect to the router to get the NBD image.

So to sum up,
trial-and-error had an empty configuration file while in beta; I think we 
should ignore that one until someone else reports it for 12.04 final,
and niplas had a old configuration file which should have been upgraded by 
ltsp-server.postinst but for some reason it wasn't, and we should keep this bug 
open until the problem is located.

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https://bugs.launchpad.net/bugs/951526

Title:
  i386: Client drops into BusyBox

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