I'm also experiencing this bug, and I managed to narrow the
problem down to the initrd image being the problem.
I can boot the new kernel 2.6.32-16-generic-pae using 
the initrd from 2.6.32-14-generic-pae (with expected warnings).

I tried creating a new initrd image with the same result (kernel panic) as with 
the initrd from the repos (initrd.img-2.6.31-16-generic-pae)

So I think this bug is related to genrating the initrd image.

/Jörgen

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Wubi/Karmic boot: kernel panic - not synching: VFS
https://bugs.launchpad.net/bugs/477169
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