I figured this out. I configured XKBLAYOUT=en option in lts.conf file. It didn't work in the beginning, but after a couple of reboots it did! But, i am facing the following problems.
I am having problems mounting a 80GB NTFS USB drive on LTSP client.But it mounts on the server without any problems.
Also, if i plug in any USB drive on the server, this comes up in all the LTSP clients and they are in write mode which means they can view and change the contents of the drive! how can i stop this from appearing in all the LTSP client machines. I removed the "Access external storage devices automatically" in User Privileges but it still appears.
And, the LTSP client boots really slow, it takes more than a minute which was not the case with earlier version of LTSP and hardy. Infact, the server with Samba, LTSP, DHCP boots faster.