interesting, i used it and it seemed to kinda work (done via windows) and i was able to boot into android but got stuck at the bootscreen (with the colorful x). wouldn't boot past that point. we suspected it had to do with permissions. all i did was unsquash it then resquash it. i have a feeling if i had access to a linux machine, it would have worked.
however i was able to make a system.ex2 file.
http://forum.xda-developers.com/showthread.php?t=581429 thanks to Artlan who showed me this link.
look there and it will give you the directions and everything you need to be able to do what i did. it does take alot more room but it appears to work. i was able to play for awhile until i gave up on what i was testing.