Tonight, a player had the loyalty card that lets you draw 5 galactica damage tokens and choose 2. He wanted to damage pegasus, so we figured he could target the pegaus pile instead of the galactica pile. Pegasus only had 1 token left, so he just used his reveal to damage pegasus its 4th time to destroy it. I can't find anything in the rules or errata that specifically talks about this case, and it seems different enough that I'm not sure it's covered under the "you can choose to damage pegasus instead" thing. Thoughts?

Yeah, i think I'd say you played it right. Finish off the pegasus, then draw 4 more tokens from the Galactica pile and choose one of those to resolve.

The rules say when damaging Galactica, you can choose a token from the Pegasus instead. I would rule that this choice is made for each token individually.

Both of those seem too overpowered, IMO. I would think you can either target one ship or the other. Even if Pegasus isn't damaged at all, my way means you get to pick exactly which two spaces on it are damaged. That's already pretty powerful.

I would say that you get to draw any 5 tokens, however you must declare how many tokens from each ship you are taking before looking at any of them. For instance, if you want to damage the Engine Room and FTL, you can't draw Pegasus tokens until you draw the Engine Room and then draw Galactica tokens, but you can draw all four Pegasus tokens to guarantee the Engine Room and hope to "get lucky" on the Galactica token, or take one Pegasus token and hope to get lucky, while taking four Galactica ones, or any combination.