The internal storage of an android device is very limited, so if your application downloads or somehow generates a large amount of data to store, you should save it on the external storage, the sd card. Even 1mb of data takes much space compared to the whole internal capacity on most of the current devices. The sd card has a bigger magnitude, and it is even expandable.
Even when storing data on the sd card you should limit the space your application can use up. For example if you cache images for an application you should track the usage the images and when the sum size of them exceeds a given limit, delete the the oldest used one.
When developing for API Level 8 (2.2) the directory get by the getExternalFilesDir() method can be used for storing files. Files stored here will be automatically deleted when the application is uninstalled.
