The 8051 microcontroller has two types of memory: program memory (ROM) which permanently stores programs, and data memory (RAM) which temporarily stores data and results. Program memory can be internal or external, accessed via the EA pin. Data memory includes registers for counters, timers, I/O ports, and serial buffers. Memory can be expanded using external ROM and RAM chips accessed through ports P2 and P3. The microcontroller addresses and reads from external memory using control signals on pins like ALE, PSEN, RD and WR.