I've built a firmware image that during the first boot copies rootfs file system image to the internal eMMC card and after that boots from it. So after that you will not have problems with free space on root file system.
I've started by testing union file systems. Here are my posts describing the problem with them:
http://talk.maemo.org/showpost.php?p...9&postcount=29
http://talk.maemo.org/showpost.php?p...9&postcount=53

But the best solution so far that I have tested is booting from internal card. The only noticeable problem was that watchdog was rebooting the prone during boot thinking that write operations on eMMC card were taking a lot of time. But after disabling it my phone worked stable and fast.

You can download my firmware from:
http://sr.uz/tmp/n900/intcard-0.1.zip

It also contains modified scripts. I've modified not only the startup scripts but also the shutdown scripts so that file system gets umounted clearly during shutdown and reboot and no data is lost.

Before you start flashing you should have 2.2009.51-1 firmware installed on your phone (if not first you should update your firmware).

All data, configuration and installed programs will be lost during my firmware installation! Another problem is that you will have to reflash your phone when new firmwer will be released.

You will need flasher-3.5 to install the firmware. All the commands should be done in the folder where you extracted firmware image.
First you should disable the watchdog and enable the R&D mode using flasher:
flasher-3.5 --set-rd-flags=no-omap-wd --set-rd-flags=no-ext-wd --enable-rd-mode
Windows version of flasher from what I heard can not enable R&D mode so you should use Linux or at least Linux live cd.
Then you should flash the new kernel:
flasher-3.5 -k zImage -f --flash-only=kernel
My kernel is built without watchdog and debug information.
And the last step would be flashing the root file system:
flasher-3.5 -r rootfs_new.jffs2 -f -R --flash-only=rootfs
After that your phone will reboot. First boot will be very long so be patient. It can take up to 5 minutes. During that time don't do anything with the phone! After that the phone will show black screen for some time and turn off. You can turn it on and start using it now.

Right now I am trying to find a way to remove watchdog completely from the system without enabling R&D mode.

This looks neat.
You say it's and fast - is there any noticeable difference in the speed between the internal flash and from the card?

Great mate!
Any thoughts on how to get a Linux running in Vista??
Virtual OS maybe?

Active write operations slow down the system a little. So for example during program installation it would be hard to do anything else. But besides that everything works as fast as it should.

You would need access to your usb port from virtual machine as well. I think Virtual Box can do that. But something tells me that it is much easier to boot from live cd.