PalmOne's Treo 650 Memory Problem Solution is to give every owner of a Treo 650 a 128MB SD-Card until PalmOne is able to fix the issue, which can take a while.
The Treo 650 use a special file allocation system for data stored in Flash. The size of each block in which data can currently be stored is 512 bytes. Files smaller than that also take 512 bytes resulting in higher memory usage than on the Treo 600. Why PalmOne did not find this out before-hand is quite strange. Looks like they did not do real world testing of the Treo 650.
More details on The Register.