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iOS memory management is more seamless than Androids. While you have all that space, the data space is limited to 150mb. One of Androids dirty little secrets.
So you will have to go into Manage Applications, and move some apps to SD (assuming you are on Froyo). You can also go through some apps and select Clear Cache.
There are other options I've read, but some require rooting the phone.
HoochieCoo has the best answer. Menu>settings>applications>manage apps...find the apps that are biggest and click on them. Then hit "move to sd card" and your good. The Dinc will find them as usual and run exactly the same. I think you can only move aftermarket apps though, but I'm not positive.