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0e1f616
(Get the code!)
@andi - sorry, I have no experience using loopback files...
@Arafat - ah, it looks like that tutorial already incorporates a workaround for this fix (i.e. steps 19-21 take care of replacing the initrd.gz). You should then just be able to insert a USB drive (no LiveCD needed at this point), boot it and it's supposed to work.