saving stuff on the sd card

You don't have to store pictures and music in the phone's memory. If you did this you'd have even less space! The message is telling you that you don't have enough space in the phone's internal memory to install the app. The fix is to see if any of the apps you've already installed can be moved onto the SD card. If you go to the Home screen then press Menu, Settings, Applications, Manage Applications, then go down the list one at a time; press the app name, look for a Move To SD Card button; if there is one, press it and wait; press the Back button to get back to the list. Repeat for all apps.

When you have enough space, you might want to install Apps2SD which runs in the background watching what you install and notifying you if a new app can be moved to the SD card.

Yes, you can move the music and pictures onto the SD card. But you'll have to install a file manager in order to do so. I recommend Astro File Manager as it also allows you to back up your installed apps to the SD card. That way, when you run short of memory again, you can uninstall a few apps and later reinstall them from the SD card.

However, to install a file manager, I think you're going to have to uninstall something else to make room. But before you do, try installing Astro from the Market - it might just fit.

When you've got a file manager installed, you can move your pics and MP3s onto the card. It doesn't matter where you put them as the phone seems to find them wherever they are, but photos usually go in the /sdcard/Pictures folder and MP3s in the /sdcard/Music folder.

You're welcome.

Apps are stored in the /system folder mostly, except when the app is programmed otherwise. SD card storage is a totally different thing. Read the a2sd section in the rooting guide in my signature.