Fat32 was giving me a few issues as well. Once I formatted to ext4, everything was flawless. The speed of the usb stick could present issues too. Formatting the drive from within your internal n7 ubuntu installation is a little different than from ubuntu on pc because it is laid out a little different. The stick must be unmounted, formatted, then your good to go.
Insert usb drive and Open "disks". Towards the bottom, tbere is a bar with a square, a "-" and gears. Tap tbe square. That will unmount the drive. It will now be a "play" type symbol. To its right, tap the gears. Choose format. Use ext4 as the fs, and name it whatever you wish. Click format. When the confirmation pops up, tap format again. Wait for it to finish. All done! Reboot and install to your ext4 formatted disk with fewer problems and no size restriction.
Skyrocket on AOKP by R4ins