The memory in the Virtual Machine is divided into a number of regions. One of these regions is PermGen. It's an area of memory that is used to (among other things) load class files. The size of this memory region is fixed, i.e. it does not change when the VM is running. You can specify the size of this region with a commandline switch: -XX:MaxPermSize . The default is 64 Mb on the Sun VMs.
If there's a problem with garbage collecting classes and if you keep loading new classes, the VM will run out of space in that memory region, even if there's plenty of memory available on the heap. Setting the -Xmx parameter will not help: this parameter only specifies the size of the total heap and does not affect the size of the PermGen region.