This problem may have pre-dated Karmic.  Here is what looks to be the identical 
problem:
https://answers.launchpad.net/ubuntu/+question/68158

Note, also that the workaround in the forum link did not work for me.  One 
difference with my system as compared to the one in the forum link is that on 
my system, the encrypted partition contains a Physical Volume which is the only 
PV in a Volume Group that is then divided into two Logical Volumes, one for 
swap and for /.  This is one of the default installation options on the 
alternate LiveCD as shown here:
http://news.softpedia.com/images/extra/LINUX/large/encryptedubuntu804-large_013.png

-- 
Karmic update "Waiting for encrypted source device..." error
https://bugs.launchpad.net/bugs/446591
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