Physical Address Extensions (PAE) is a feature found on most 32-bit x86 CPUs that allow addressing system memory greater than 4GB. Vanilla 32-bit kernels without PAE can't address more than 4GB of RAM, but most processors still in use today support the CPU feature. Running the 32-bit PAE kernel on systems with less than 4GB of physical memory is not an issue, as long as your CPU supports PAE. Since nearly all hardware that will be touching the 32-bit Ubuntu 12.04 LTS release supports PAE, Canonical wants to drop support for the non-PAE kernel. (64-bit users don't need to worry about PAE.)
The kernel developers at UDS were near unanimous about dropping the non-PAE i386 kernel, but following the event and word spreading of this move, there's some criticism building. Users of ancient hardware are upset that they may not be able to install Ubuntu 12.04 "Precise Pangolin" and would like to at least have support until the Ubuntu 12.04 (LTS + 1) release.
The old CPUs that can't handle PAE are mostly Intel Pentium II, AMD Geode LX, and VIA C3 hardware and earlier. The only CPUs that still might be worth running in 2011 that don't handle PAE are some Intel Pentium M notebooks, but then again this is still very aging hardware by today's standards. It's time to upgrade.
There's some feedback about the Ubuntu 12.04 PAE 32-bit situation in this ubuntu-devel discussion. Another decision as well made during the developer summit in Orlando is to recommend 64-bit Ubuntu by default, but the 32-bit version will still be around, it's just a matter of whether it supports non-PAE hardware or not.
For reference, here are some Ubuntu 11.04 benchmarks of 32-bit, 32-bit PAE, and 64-bit Linux kernels I did earlier this year.