The extra memory is called Flash ROM. The operating system and the applications that come with your Palm Pilot are stored in ROM. Databases and anything you install yourself are stored in RAM. The stuff stored in ROM is permanent; even after your batteries die and everything you've got in RAM is gone, you've still got your datebook and calculator applications, held safe in ROM.
After a year with a Palm Professional running with one meg of RAM, the 2 megs in my new Palm V seemed downright luxurious — at least for the first week. Soon I had just about the same lack of free memory that I'd had before. Fortunately, my Palm had a big chunk of free memory I didn't know about, and with Brayder Software's JackFlash or TRG Products' FlashPro I could get at it.