It's kind of funny what you tell: i went through exactly the same process!
I was near to extracting the file manually, but I thought that wouldn't do anything, because I guessed the installer would continue doing other things and it wasn't that smart to realize the file was already extracted, so it wouldn't try to extract it again.
I'm also stuck in that step. I see in Conky that I've got 38.9 MB left on rootfs. Do you have more or less than that?
However I don't think that matters: I wouldn't have been able to install Nitdroid on the 1 GB card, I suppose...
*sigh*