Note that with most Android builds, applications are installed to the phones internal memory, which reduces the free RAM available to the system.

...you mean it reduces free storage space available to the system, right? RAM and the non-volatile flash used for storing the OS, the installed apps and your data are two different things on an Android phone, just like on a computer. Filling up the ROM with apps only means you won't be able to install more apps, it doesn't affect anything else. When you update to Froyo, you can move apps to the SD card, so it has even less importance.

My phone, for example, has 384MB of RAM (memory) and 512MB of ROM (storage). The two don't flow into each other.