There is a tool that can resize your pup_save file. I don't remember where it is offhand, because I'm not on Puppy at the moment. Look around and read the menus, there is an entry that says something like, "Resize Pup Save File" or something like that. I recently resized my pup_save file and it works just fine and now I have more room for my stuff.
If you need more help, there's always the puppy forums too: http://www.murga-linux.com/puppy/