There is not enough free memory and oom-killer kills your xterm before the job is done. You may enable swap file or close unneeded applications. You may also try it over ssh so osso-xterm does not take memory. I'd start with enabling swap - control panel->Memory->Virtual. You may also just try second time in a row and hope oom killer will pick something else or memory is not that tight second time (strange but possible).

You can do it anytime it is not related to the cloning. It won't be much useful without system on mmc but it won't hurt.

As for the corrupted flash and reboot loop you mentioned - did you unmount both /floppy and /opt before reboot? Anything you mounted by hand should be unmounted before reboot.