what does the internal memory do
? Is it like ram what is the max that could be added.

128MB RAM
256MB Flash
RAM is memory for running the applications.
Flash storage is for the kernel and internal filesystem.
You can't add RAM (but you can extend your VM (virtual memory) by adding swap space (done in the control panel), taken from flash.)
You can't extend the internal Flash either, but the N800 has room for 2 SD slots, i.e. more flash storage, put your docs, pictures, music etc. there.

You can boot from MMC (770) or one of the SD cards (N800) in which case your "internal flash" then becomes the size of the partition used to boot the device - for example, if you booted from an MMC card with a 512MB ext2 partition you will have 512MB "internal" flash into which you can install applications etc. Applications can only be installed on "internal" memory/flash at this point in time.

The RAM is fixed at 64MB (770) and 128MB (N800) and cannot be altered.

You can add up to 64MB (770) and 128MB (N800) swap using available space on a flash card - larger amounts of swap can be added if you create the swap yourself rather than use the built-in GUI applet.

In my particular case, I've got a 770. So that it's got 64MB of "RAM". I've added 64MB of Virtual Memory (that is a Swap file mounted over the MMC vfat partition). Besides of that, I've got an ext2 partition of 700MB, where I've created an image of the whole system. So that I boot the system from this new partition, and I can install as many as 700MB of applications. Because now my "internal memory" is as big as 700MB. And faster than before, since it's not compressed and journaled (ext2 versus jffs2).