Comment 4 for bug 573975

Some ideas why logging in could fail:
 * If for a second it says "server not responding, restarting..", then it might be an ssh-keys problem, which you normally solve with sudo ltsp-update-sshkeys && sudo ltsp-update-image.

 * If you do see that "not responding" message, and updating the ssh keys doesn't solve it, try putting
[Default]
  SCREEN_02=shell
  SCREEN_07=ldm
in lts.conf. Reboot the client, switch to vt2 by pressing Alt+Ctrl+F2 and enter this command:
  ssh _user_@server
Replace "_user_" with an existing username, but leave "server" as it is without replacing it with your actual server name or IP.
This command should allow you to login without producing any warnings at all. If you do see a warning then it's still an ssh keys error.

 * If it appears to be logging in but then X crashes and you get back to the login screen, you may find some hints on that user's ~/.xsession-errors.

 * A very frequent problem with the same symptoms as yours is caused by compiz, which is enabled by default on Ubuntu. Try entering the following command to disable it:
  sudo gconftool-2 --direct --config-source xml:readwrite:/etc/gconf/gconf.xml.mandatory --type string --set /desktop/gnome/session/required_components/windowmanager metacity
No reboot necessary, neither on the server nor the client. Just enter that command on the server and try to login on the client.

If you still have no luck, try the LTSP IRC channel, it's very helpful on troubleshooting such problems:
http://webchat.freenode.net/?channels=ltsp