Through more experimentation I found a manual workaround that at least
gets me 'in'.

After the splash shows "Waiting for /var [SM]" I try pressing "M" and
nothing happens. I then press Escape to dismiss the splash screen. I
press "M" again and get

init: plymouth main process ($PID) killed by SEGV signal

I then press Alt+SysReq+i to get to a root shell.

I now manually mount the USB key and run the cryptsetup commands:

mkdir /tmp/USB
mount /dev/sdb1 /tmp/USB
cryptsetup luksOpen /dev/mapper/Ubuntu-Lucid_var_enc var --key-file 
/tmp/USB/path/to/key/file
cryptsetup luksOpen /dev/mapper/Ubuntu-home home --key-file 
/tmp/USB/path/to/key/file

Finally I restart the mountall script:

start mountall

And the system continues on to start GDM.

Now I have a way in I'll try to discover some clues on this.

-- 
lucid: Failure to bring up cryptsetup devices by key files (when not using 
"splash")
https://bugs.launchpad.net/bugs/532898
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