Ubuntu 7.10 Gutsy Gibbon has new boot option "only-ubiquity" which does not load the Gnome desktop and only starts Ubiquity installer on default Ubuntu background. I decided to try this option on one COMPAQ Desktop PC with 128 MB RAM.

This procedure works and can create an ugly, but bootable Ubuntu live cd (along with the hardware autodetection and configuration) from scratch. You do not need to start from an already-made live cd.