Let's assume you  created an root filesystem using the narcissus online builder. It's named my_cool_filesystem.tar.bz2 and you want to have an 600MB filesystem to have lot's of free space.

dd if=/dev/zero of=narcissus.img bs=1M count=600
mkfs.ext3 narcissus.img

mkdir /mnt/narcissus
mount -o loop narcissus.img /mnt/narcissus
tar -xvjf my_narcissus.tar.bz2 -C /mnt/narcissus

You have to answer yes to the question if you want to create a filesystem in a file instead of a block-device.

If you'd go about installing debian in an loop image mounted as /mnt/debian on the a5it while booted in angstrom it would look like this:

cdebootstrap-static --flavour=minimal --include=ifupdown,udev,procps,netbase,vim-tiny,module-init-tools,wget,openssh-server,screen,apmd --allow-unauthenticated sid /mnt/debian/ http://ftp.de.debian.org/debian/