If it matters, my PXA270 is SDK-PXA270-520-10-6432 and has the 32MB flash as well.
But a portion of that flash is used for the bootloader and another portion for the Kernel image. By default Logic uses a partitoning scheme like:
0x00000000-0x000c0000 : "Bootloader"
0x000c0000-0x01000000 : "YAFFS"
0x01000000-0x02000000 : "Filesystem"
Where YAFFS refers to the partition that contains the Kernel image.
That being said, you clearly don't (can't) want to create a 32MB image as you will have no space for the rest of the stuff. Now, you can indeed shrink the YAFFS partition to be smaller and thus enlarge the Filesystem partition, but you will have to leave the Bootloader partition/location intact.
The stock Kernel.org 2.6.18 Kernel should definitely build. Make sure that you can do that first before attempting to apply any patches. How did you get the cross-compilers for the PXA?
The Buildroot program I mentioned in my previous post will build these cross-compilers for you to use.
The stock 2.6.18 Kernel is missing the MTD maps code. So you will need to patch the Kernel for that at the least to even get up and running on the PXA270. The stock Kernel is also missing the CF code which would allow you to mount it, so you will want to get those patches as well.
Please look at thi
thread to get your hands on the necessary patches.