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Thankfully, this is an issue that is less common than it used to be, but I've ran into limited internal storage issues before with an older LG. Obviously you have rooted your device, so you've already taken the first step to addressing this. What you are going to need to do is "fool" your device into thinking the SD card is internal storage. Android 2.2+ allows the user to "move to SD card", but it really only allows you to move some of the files associated with a given app to the SD card, so that a chunk of internal storage is still used with every app. When you are only starting out with 100MB or so, it doesn't take long to get down to around 20MB, where you start to get usability problems and error messages.
There are two main ways to address this is to either flash a custom ROM that allows you to link your apps to a partitioned SD card as ersatz internal storage. I think Cyanogen 7 includes this, but I'm not 100% certain. I'm not familiar with your ROM at all, but you might want to check it out more thouroghly. The other way is through the use of an application. I used Link2SD, which I got from Google Play, to address this issue myself. This article has a decent walk through on how to partition your SD card correctly and configure Link2SD. It changed my old phone from being a pain to a useful device that I could download pretty much anything on. I still have it and use it, in fact, even though I've purchased newer and more powerful Android phones since.
Hopefully this will help you get some more use out of your phone. Good luck!