This works on my systems. They have /home and swap as partitions on a
LVM volume, in turn on a  LUKS partition, and the key is this: You must
(whether you ever hibernate or not) specify RESUME=UUID=(UUID of swap
partition), then update-initramfs -u . Now, the passphrase is called in
the initramfs, NOT echoed to a console under the splash screen, works
fine splash or no.

To work without a resume image specified is possible but very buggy, and
your problems do not suprise me. What happens is this: Cryptsetup is
called by /etc/init/cryptdisks-enable.conf if you are using the current
(karmic) build of cryptsetup. Cryptsetup now calls for the passphrase-
but it is not the only program running! Always after the first call
another program will echo text to the console, making passphrase entry
impossible. The second try, however, generally works in my tests(your
results may differ!) as other programs are now waiting instead of
echoing their own messages. Same with or without splash-except, of
course, for the echo-to-console under the splash screen bug, which is
still there.

With LVM, one passphrase call handles the entire volume group, and is
called in the initramfs, same as before. Without this arrangement,
encryption becomes a real bugfest as of now. Cryptsetup in init needs to
have a console to itself(all other outputs suppressed)-or else be
modified to call everything in /etc/crypttab during the initramfs,
whether needed for a resume image or not. It has not really been ported
very well to upstart, it seems.

-- 
crypto disk passphrase can't be entered
https://bugs.launchpad.net/bugs/464292
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