It's official, the app limit space restriction will be lifted once 1.3.5 comes out.
http://www.precentral.net/webos-135-...pp-space-limit
The fix is to move the apps over the larger (7 gb) /media partition and then encrypt the folder when the Pre is in USB mode. Interestingly enough the Internalz app can see the folder after USB mode is disconnected.