The reason is simple (I came to this realization reading the Storm2 spec sheet over on CB)
S2 is listed as having 256MB of Flash memory, and 2GB of something called eMMC
By the logic, one could assume the following:
S1 has 128MB of Flash memory, and 1GB of eMMC
eMMC is a low-cost memory technology which uses a MultiMediaCard controller (once a popular flash memory standard in some digital cameras). It is an older technology, and a relatively slow technology. (eMMC stands for Embedded MultiMediaCard). It's main advantage is its small size (the memory and controller fit into a ball-grid-array chip) - higher speed versions are not all that slow, it can run up to 52MB/sec; however i'm sure the version RIM is using is much slower.
The "Flash" memory, on the other hand; is likely the expensive Single Level Cell design (used in high-end flash drives and SSDs) - that is why there is so little of it. What it boils down to is this: the eMMC memory is more suited to media storage than running apps. Apps would likely launch unacceptably slow from the eMMC memory, especially as they become more complex.
I'm sure RIM COULD allocate the eMMC to app storage; after all PPC devices can use SD cards to store apps. However, if you are using a slower, less expensive SD card, app loading performance can be downright painful. Perhaps RIM just wants to maintain relatively quick loading times, and thus only allow apps to run from the smaller Flash memory.