Well, why should Holy1 be able to hit multiple targets but holy doesnt?
Because Holy2 is more powerful than most other level 2 spells. Allowing it to hit multiple targets would be like having a level 3 spell very early in the game. Just like Water1. Water is more powerful than the other level 1 spells, so you are only permitted to use it on single targets. I had to add some diversity to the new spells so there were actually differences between using Ice2, Fire2, Bolt2, Water2, and Holy2. If you are fighting a boss, then you will want to use a lot more Holy2 spells than Ice2 spells because it will cause more damage to a single enemy. If you are fighting 4 Headhunters, then you might wipe them out with 2 Ice2s, but it would take 4 Holy2s. Get it?
The real answer is that the Holy2 Animation crashes EpsxE when used on multiple targets. The same is true for many different animations. The best remedy to this was to make different spells more powerful than others. Don't worry, Holy3, Holy Flash, and Holy Judgement all cause Holy Damage to multiple enemies; as would Holy=Elemental in your weapon, or a Holy Elemental Weapon and Slash-All.
Thanks for the info about the Ice materia and AP tho. Also, I believe that "Laser2" took the place of the "Frog" spell. AFAIK, this is written into the main programming of the game and cannot be fixed. That is a nice exploit to know about my mod though. Equip a Laser materia when going into the Battle Arena and you will have a unique advantage.