I've been doing some more reading, and learned about the squashfs file and the boot= parameter.
If I understand it, my entry should look something like:
menuentry "Moblin 2.0" {
loopback loop /boot/img/moblin-2.0-final-20090924-001.img
linux (loop)/isolinux/vmlinuz0 boot=LiveOS iso-scan/filename=/boot/img/moblin-2.0-final-20090924-001.img nosplash --
initrd (loop)/isolinux/initrd0.img
}
The squashfs file is located on the .img, under the folder /LiveOS/squashfs.img. There's also a osmin.img in there to, don't know what that is.
Unfortunately, I'm still stuck, since it didn't seem to make any difference, the boot process still complains that it can't find the root FS, and kicks me back to bash.
Some insight from some smart people would be very helpful. Any thoughts or suggestions?