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The term "memory" is used to refer to a number of different things. On the most basic level, memory is where software runs. Programs and the files they use must be loaded into memory in order to work. There's essentially two types of memory that we need to worry about: physical memory and virtual memory.
Physical memory is the actual RAM (random access memory) you have installed in your computer. So if someone says that their computer has 64 megabytes of RAM, they're talking about the physical memory. Virtual memory is the total amount of memory Windows can use, which is 4 gigabytes.
See the section on the swap file for more information on how virtual memory is used.