I realized when I did an SSH into my ipod touch 2g two things:

1) it has 2 partitions mounted...1 for the OS and 1 for songs and apps???
2) My smaller OS partition is almost full

Here's what I got from a shell using df -h:

Filesystem Size Used Avail Use% Mounted on
/dev/disk0s1 680M 630M 44M 94% /
devfs 18K 18K 0 100% /dev
/dev/disk0s2 6.9G 4.5G 2.4G 66% /private/var

My /tmp directory is empty and aptitude autoclean finds nothing to delete. I'm thinking that 2nd partition has a lot of space, so maybe I can set up a symbolic link (ln -s) in the first partition that points to the 2nd partition so that cydia apps start getting saved there?

So, how can I go about freeing up space on the first partition or make my app space larger?