Hi,
Yes, the RAM on an arduino is limited to 1K (at present).
However, if the data in the array is read-only (that is, you initialize it but don't change it), then you can use some of the program space to store the data. This is called progmem. Since the program space is 8k (for the 168 chip), you have a lot more room to mess around with.
Look here:
http://www.arduino.cc/en/Reference/PROGMEM
for details.