From the blog post entitled 1GB storage allocation for free Hotmail accounts is live! on the Hotmail Windows Live Mail team's blog we learn

1GB storage allocation for free Hotmail accounts is live! If you are new to Hotmail, then your account is created automatically with 1GB storage allocation. All existing accounts are at 1GB. To see that you would need sign out and sign in again. The storage meter bar in our classic UI would show 1000 as the max number. If your account is migrated to Windows Live Mail then your storage allocation is 2GB.

This is great news for the hundreds of millions of people with Hotmail accounts. Kudos to the mail team on making this switch.