Actually, this seems to be a known issue. From the "Known issues" on
http://www.ubuntu.com/testing/karmic/alpha1 : "There are no desktop CDs
with live systems available, since the current kernel still lacks
support for the "aufs" file system."

So apparently aufs instead of squashfs will be used for the LiveCD in
karmic.

-- 
Karmic desktop CD fails to boot because of different squashfs versions
https://bugs.launchpad.net/bugs/375352
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