I have the same problem as Steve.  If I remove "persistent" from the
kernel string, it works OK. (but no persistence of course).  With
persistence, symptoms identical.  It seems to timeout after mounting
squashfs.  If you wait for USB data reads to stop, then exit shell, it
mounts further disks, and after 4th exit it continues on to full
desktop. (but no persistent storage)  I have tried the usb-creator with
4GB memory stick and 80GB 2.5" usb (laptop) disk.  Identical in both
situations.

Using usb-creator without persistent storage boots/works as advertised.
(no persistent storage)

-- 
Ubuntu 9.04 beta desktop fails to boot from usb-stick
https://bugs.launchpad.net/bugs/350946
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