kernel panic when booting from USB disk

Using Ubuntu 10.10 live CD to install the system on a USB disk (kernel 2.6..35-24-generic)
When trying to boot from a 1 TByte USB disk I get a kernel panic because the root file system in initrd cannot be mounted.
I traced the problem down to the following line in the init script:

# Note that this only becomes /dev on the real filesystem if udev's scripts
# are used; which they will be, but it's worth pointing out
if ! mount -t devtmpfs -o mode=0755 none /dev; then
 echo "W: devtmpfs not available, falling back to tmpfs for /dev"
 mount -t tmpfs -o mode=0755 udev /dev
 [ -e /dev/console ] || mknod -m 0600 /dev/console c 5 1
 [ -e /dev/null ] || mknod /dev/null c 1 3
fi

It seems that /dev is not mounted with type devtmpfs but I do no see the error message neither. The kernel panics shortly after this.
I replaced the code by

mount -t tmpfs -o mode=0755 udev /dev
[ -e /dev/console ] || mknod -m 0600 /dev/console c 5 1
[ -e /dev/null ] || mknod /dev/null c 1 3

After this modification (this was the code in an earlier init script (e.g. initrd.img-2.6.31-14-generic)
everything works fine. I seem to remember that also the pointer to the background image in /etc/grub.d/05_debian_theme
was wrong, but this one was easier to fine.
Uli

ProblemType: Bug
DistroRelease: Ubuntu 10.10
Package: linux-image-2.6.35-24-generic 2.6.35-24.42
Regression: Yes
Reproducible: Yes
ProcVersionSignature: Ubuntu 2.6.35-24.42-generic 2.6.35.8
Uname: Linux 2.6.35-24-generic i686
AlsaVersion: Advanced Linux Sound Architecture Driver Version 1.0.23.
AplayDevices:
 **** List of PLAYBACK Hardware Devices ****
 card 0: Intel [HDA Intel], device 0: VT1708S Analog [VT1708S Analog]
   Subdevices: 2/2
   Subdevice #0: subdevice #0
   Subdevice #1: subdevice #1
Architecture: i386
ArecordDevices:
 **** List of CAPTURE Hardware Devices ****
 card 0: Intel [HDA Intel], device 0: VT1708S Analog [VT1708S Analog]
   Subdevices: 2/2
   Subdevice #0: subdevice #0
   Subdevice #1: subdevice #1
AudioDevicesInUse:
 USER PID ACCESS COMMAND
 /dev/snd/controlC0: uli 4207 F.... pulseaudio
CRDA: Error: [Errno 2] No such file or directory
Card0.Amixer.info:
 Card hw:0 'Intel'/'HDA Intel at 0xfe9f4000 irq 43'
   Mixer name : 'VIA VT1708S'
   Components : 'HDA:11060397,10431111,00100000'
   Controls : 20
   Simple ctrls : 13
Date: Wed Jan 26 16:31:42 2011
HibernationDevice: RESUME=UUID=44bc4568-63c5-4f54-9933-066530a49a78
InstallationMedia: Ubuntu 10.10 "Maverick Meerkat" - Release i386 (20101007)
MachineType: ASUSTeK Computer Inc. K50IJ
ProcCmdLine: BOOT_IMAGE=/boot/vmlinuz-2.6.35-24-generic root=UUID=de006651-c2e5-4aa4-9977-067968a55a5f ro rootdelay=10 rootfstype=ext4 crashkernel=384M-2G:64M,2G-:128M quiet splash
ProcEnviron:
 PATH=(custom, user)
 LANG=en_US.utf8
 SHELL=/bin/bash
RelatedPackageVersions: linux-firmware 1.38
RfKill:
 0: phy0: Wireless LAN
  Soft blocked: no
  Hard blocked: no
SourcePackage: linux
dmi.bios.date: 07/10/2009
dmi.bios.vendor: American Megatrends Inc.
dmi.bios.version: 209
dmi.board.asset.tag: ATN12345678901234567
dmi.board.name: K50IJ
dmi.board.vendor: ASUSTeK Computer Inc.
dmi.board.version: 1.0
dmi.chassis.asset.tag: No Asset Tag
dmi.chassis.type: 10
dmi.chassis.vendor: ASUSTeK Computer Inc.
dmi.chassis.version: 1.0
dmi.modalias: dmi:bvnAmericanMegatrendsInc.:bvr209:bd07/10/2009:svnASUSTeKComputerInc.:pnK50IJ:pvr1.0:rvnASUSTeKComputerInc.:rnK50IJ:rvr1.0:cvnASUSTeKComputerInc.:ct10:cvr1.0:
dmi.product.name: K50IJ
dmi.product.version: 1.0
dmi.sys.vendor: ASUSTeK Computer Inc.