When talking about cell phones and MP3 players with flash-based internal storage it's become commonplace to refer to the device's capacity as "memory." Even Walt Mossberg and other respected tech writers — the very folks who are supposed to make technology easier to understand — are guilty of this practice:
"The G1 also has much less memory than the iPhone."
This is technically acceptable, I suppose, as the flash mechanism used for data storage inside these devices is more similar to memory (i.e. RAM) than it is to a hard drive, but it's a pretty confusing use of language.
When talking about computers, the term "memory" refers to RAM, which is a temporary, non-user accessible space used by applications to boost the performance of certain types of operation. The term "disk space" is often used to talk about the amount of data storage available on the computer. Referring to the amount of data storage on a cell phone as "memory" is just plain confusing. But calling it "disk space" would be equally confounding.
The proper way to refer to the amount of data storage is "capacity." This term is device- and mechanism-agnostic — i.e. it means the same thing no matter what storage medium or device you're talking about. And it's completely accurate and specific — no one will ever wonder what you mean when you say "capacity;" it can only mean one thing.
So folks, please, stop calling it "memory." It's capacity. Period.