On that airplane the N1 indicators were at the top of the engine instrument stack with EPR being the second one down. When power was applied for takeoff, the pilots referenced the EPR gauges and read what appeared to be the proper EPR, and we know now that it was not correct (because the PT2 probes were clogged, probably with ice – but NOT from what a lot of people believe), and scanning down the instrument stack from that point, as is the habit with most pilots, all the other indications appeared to be “normal” (unfortunately, at that time, normal was essentially understood to be having the needles of both sets of gauges parallel with each other) and the specific N1 indication, which could have been seen as quite low, was not taken into the scan – or at least that is the speculation.
AFAIR, the CVR revealed the captain saying "Real cold, real cold", referring to the engine temperature being lower than it should when setting T/O thrust. I think they concluded that it was the fear of going over the limits of the engine that kept them from firewalling it.
(Edited, because I found the transcript)
15:59:24 TWR Palm 90 cleared for takeoff.
15:59:28 TWR No delay on departure if you will, traffic's two and a half out for the runway.
15:59:32 CAM-1 Okay, your throttles.
15:59:35 [SOUND OF ENGINE SPOOLUP]
15:59:49 CAM-1 Holler if you need the wipers.
15:59:51 CAM-1 It's spooled. Real cold, real cold.
15:59:58 CAM-2 God, look at that thing. That don't seem right, does it? Uh, that's not right.
16:00:09 CAM-1 Yes it is, there's eighty.
16:00:10 CAM-2 Naw, I don't think that's right. Ah, maybe it is.
16:00:21 CAM-1 Hundred and twenty.
16:00:23 CAM-2 I don't know
See
http://www.avweb.com/news/safety/182404-1.html and
http://www.ntsb.gov/publictn/1982/AAR8208.htm