[Nexus One Android Development] Docmjldds:
Install from sdcard...

Finding update package...

I:Update location: SDCARD:Format-modboot-signed.zip

Opening update package...

I:Update file path: /sdcard/Format-modboot-signed.zip

Installing update...

I:Parsed META-INF/com/google/android/update-script

calling command show_progress

calling command format

Formatting DATA:...

mtd: not erasing bad block at 0x00220000

mtd: not erasing bad block at 0x00320000

mtd: not erasing bad block at 0x00520000

mtd: not erasing bad block at 0x01240000

mtd: not erasing bad block at 0x02cc0000

mtd: not erasing bad block at 0x037e0000

mtd: not erasing bad block at 0x042e0000

mtd: not erasing bad block at 0x04320000

mtd: not erasing bad block at 0x04660000

mtd: not erasing bad block at 0x06080000

mtd: not erasing bad block at 0x073c0000

mtd: not erasing bad block at 0x075e0000

mtd: not erasing bad block at 0x07d20000

mtd: not erasing bad block at 0x097a0000

mtd: not erasing bad block at 0x09d00000

mtd: not erasing bad block at 0x0c140000

calling command format

Formatting DATA:...

mtd: not erasing bad block at 0x00220000

mtd: not erasing bad block at 0x00320000

mtd: not erasing bad block at 0x00520000

mtd: not erasing bad block at 0x01240000

mtd: not erasing bad block at 0x02cc0000

mtd: not erasing bad block at 0x037e0000

mtd: not erasing bad block at 0x042e0000

mtd: not erasing bad block at 0x04320000

mtd: not erasing bad block at 0x04660000

mtd: not erasing bad block at 0x06080000

mtd: not erasing bad block at 0x073c0000

mtd: not erasing bad block at 0x075e0000

mtd: not erasing bad block at 0x07d20000

mtd: not erasing bad block at 0x097a0000

mtd: not erasing bad block at 0x09d00000

mtd: not erasing bad block at 0x0c140000

calling command show_progress

calling command format

Formatting CACHE:...

mtd: not erasing bad block at 0x01480000

mtd: not erasing bad block at 0x028e0000

mtd: not erasing bad block at 0x046e0000

calling command format

Formatting CACHE:...

mtd: not erasing bad block at 0x01480000

mtd: not erasing bad block at 0x028e0000

mtd: not erasing bad block at 0x046e0000

calling command show_progress

calling command format

Formatting SYSTEM:...

mtd: not erasing bad block at 0x02420000

mtd: not erasing bad block at 0x03140000

mtd: not erasing bad block at 0x03480000

mtd: not erasing bad block at 0x08400000

mtd: not erasing bad block at 0x08640000

calling command format

Formatting SYSTEM:...

mtd: not erasing bad block at 0x02420000

mtd: not erasing bad block at 0x03140000

mtd: not erasing bad block at 0x03480000

mtd: not erasing bad block at 0x08400000

mtd: not erasing bad block at 0x08640000

calling command show_progress

I:Installation complete.

Install from sdcard complete.

I:Set boot command ""

Install : Format-modboot-signed.zip ?

Press Trackball to confirm,

any other key to abort.

Install from sdcard...

Finding update package...

I:Update location: SDCARD:Format-modboot-signed.zip

Above is the probable cause of your issues. Like mine, you have a fair amount in /data. I would be curious when you install a stock CM7 ROM that is NOT running any a2sd, what your free internal memory reports.