I just had the same issue and was able to increase the emulator memory. I first had to download eclipse-SDK-3.5.2-win32-x86_64. When I tried to increase the memory using eclipse-SDK 3.5.1 it did not work. After downloading Eclipse and installing the android SDK I created a custom emulator through Window->Android SDK and AVD Manager. Then New and in Hardware I set Max VM application heap size to 192MB and Device ram size to 192MB. Other fields I set that are not related to memory were Target: Andorid 2.0, SD Card 256MB. After doing this I created an android application that created an 800x2500 Bitmap and Memory usage showed 20,000K.
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