Arduino as Capacitive Sensor

Strange, maybe you have a older version of the arduino. I looked at mine and I still have plenty of space left after uploading the code. Weird.
It could the float variable like westfw said but that I would find this strange. That would mean you are very very limited then. Try without the two variable I added, so at least you could see something in the Serial Monitor if that's the problem. It's the button next to the Upload one. Upload your code, when done click this button and wait a few second.

// CapSense.pde
// Paul Badger 2007

int  i;
unsigned int x, y;
float accum, fout, fval = .07;    // these are variables for a simple low-pass (smoothing) filter - fval of 1 = no filter - .001 = max filter
int ledPin = 5;   // select the pin for the LED

void setup() {
  Serial.begin(9600);

  //DDRB=B101;     // DDR is the pin direction register - governs inputs and outputs- 1's are outputs
  // Arduino pin 8 output, pin 9 input, pin 10 output for "guard pin"
  //  preceding line is equivalent to three lines below
  pinMode(8, OUTPUT);     // output pin
  pinMode(9, INPUT);      // input pin
  pinMode(10, OUTPUT);    // guard pin
  digitalWrite(10, LOW);  //could also be HIGH - don't use this pin for changing output though
  pinMode(5, OUTPUT);

  analogWrite(ledPin,255);
  delay(10);
  analogWrite(ledPin,0);
}

void loop() {
  y = 0;        // clear out variables
  x = 0;

  for (i=0; i < 4 ; i++ ){       // do it four times to build up an average - not really neccessary but takes out some jitter

      // LOW-to-HIGH transition
    //PORTB = PORTB | 1;                    // Same as line below -  shows programmer chops but doesn't really buy any more speed
    digitalWrite(8, HIGH);    
    // output pin is PortB0 (Arduino 8), sensor pin is PortB1 (Arduinio 9)                                    

    //while ((PINB & B10) != B10 ) {        // while the sense pin is not high
    while (digitalRead(9) != 1) {    // same as above port manipulation above - only 20 times slower!                
      x++;
    }
    delay(1);

    //  HIGH-to-LOW transition
    // PORTB = PORTB & 0xFE;                // Same as line below - these shows programmer chops but doesn't really buy any more speed
    digitalWrite(8, LOW);              
    //while((PINB & B10) != 0 ){            // while pin is not low  -- same as below only 20 times faster
    while(digitalRead(9) != 0 ) {     // same as above port manipulation - only 20 times slower!
      y++;  
    }

    delay(1);
  }

  fout =  (fval * (float)x) + ((1-fval) * accum);  // Easy smoothing filter "fval" determines amount of new data in fout
  accum = fout;

  Serial.print((long)x, DEC);    // raw data - Low to High
  Serial.print( "   ");
  Serial.print((long)y, DEC);    // raw data - High to Low
  Serial.print( "   ");
  Serial.println( (long)fout, DEC); // Smoothed Low to High

}

Good Luck.