After following the entire memory discussion, there is still one question open: Exactly what flash memory chip does PalmOne use on the Treo 650? That would allow us to determine if there is a pin compatible higher capacity version that could easily be replaced for the current 256MBit chip, or if we have to wait longer because increasing the capacity requires a layout change.
After a quick glance at some of the available flash chips it seems that with lower capacity you also get lower supply current (good for battery life) and longer lifetime parts. So there could be a tradeoff that has been made. But since PalmOne has not mentioned this so far, I believe that at PalmOne, they simply overlooked the impact of the larger allocation granularity, and therefore made the wrong call on required memory. Otherwise the SDK documentation would not be silent on this point!