that doesn't sound right at all. the /system partition in small and it's in that range because it only requires there to be room for the rom which should be read only and never changes, there is very little extra room on the /system partition stock but that doesn't matter because you dont install new apps here to begin with and app data is stored in /data/data while apps go in /data/app.
the /data partition is 1gb or so and very hard to fill with apps, you can also move apps to the 14gb internal sd storage.
i dont know why you have a /system/data folder, i haven't run froyo in a while but that sounds wrong. i don't know why you are still on froyo but you should have no issues installing apps based on storage. there is a bug that was giving that error because of some settings in the rom that didn't agree with certain versions of the market though....