Google fails to address app storage issue with Droid and Android 2.0 – Android and Me:
The Motorola Droid will be the most powerful Android phone to date when it launches on November 6, 2009. However, the device still features the same shortcomings of all other Android phones. The Droid ships with a 512 MB ROM which contains only 256 MB available for app storage.
Google does not support installing apps to the SD card (and likely never will), so developers are limited in what they can create.
Have you seen all the awesome iPhone and iPod Touch games? Hardly any of them would fit on an Android phone. It is not uncommon for popular titles to easily exceed 100 MB. For example, the game Myst takes up a whopping 727MB.