Christiansen (happylinux), problem is not in the squashfs image, but in
syslinux boot loader or something related - the same Ubuntu 12.04
squashfs image starts and installs fine if GRUB boot loader is used for
startup. Try Multisystem
(http://liveusb.info/dotclear/index.php?pages/install ) LiveUSB creator
(choose GRUB boot loader) instead of Ubuntu's startup-disk creator
(which uses syslinux) and you will see the difference :)

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https://bugs.launchpad.net/bugs/930447

Title:
  Unable to start Ubuntu 12.04 live CD with syslinux loader on Pentium M
  x86 Laptop due to bug in PAE kernel, initramfs or syslinux

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