The 1GB is internal memory. So, its for apps, games (From the Android Market) and the Android system itself. SD card will hold pictures, videos, music and other media. 1GB is a solid amount for Android devices, when I had a HTC Magic it did not come with a lot of onboard usable memory (Less then 100 MB) and that cant hold a lot...1GB should be good...if not, try caching apps to SD.
I agree with you completely. I was considering the G2x with 8GB of memory, then was blown away when I saw this phone. THEN I saw 1GB and now I'm reconsidering, may have to go with the G2x.
For those of you saying app2sd, I currently have a Nexus One which has a sad 200MB, and I have to keep deleting apps to try new ones. Apps2SD does not move all of the data over, and apps that hold lots of cache can still take 20-30MB. App sizes are constantly going up, and 1GB will not seem like that much a year or so from now.
If I have to hang on to this thing for 2 years then it needs to be able to handle 2 years of apps.