to your ltsp-build-client line.Code:--dist hardy
Take care if you're already using the squashfs utils somewhere. It's possible that you won't be able to open images generated with the backported squashfs-utils with your current kernel. Just a heads-up; it doesn't matter for mythbuntu-diskless.
I'm running (and developing) mythbuntu-diskless on my Gutsy box so it's certainly possible