Had an interesting experience - I entered the market I was unable to install two available updates - Titanium Backup and Handcent - got error messages saying that I was out of room.
Checked in /System in Droid Root Exp - 191 used, 87 Free.
Checked in SD card storage and it was showing 0 free. Aha!
Deleted a couple of old Nandroids, and suddenly I was able to install again.
Checked in Apps>Manage and I have zero apps installed on SD card.
So why does the Market care if my SD card is full to install an app that doesn't get installed on my SD card.
Neither app (Titanium Backup and Handcent) are on my SD card, in fact, as noted none installed on SD card.