Memory bug

We are currently experiencing a problem with memory usage on our application
server.  There is an application on our server that uses SQL Server to keep
track of data that is sent from our mainframe computer here. There are two
databases that are kept PPMDB and HISTDB.  Both have the same structure, but
different time periods of updating.  PPMDB is updated every 2 minutes, and
HISTDB is every 4 hours.  The application that runs on the server connects
to the databases through the ODBC driver.  Once that is done, it starts the
SQL engines, which take up a good amount of memory, 8 MB.  The starting
point of memory ranges between 75 MB and 85 MB. The system is equipped with
320 MB of memory.  What happens is that once the first update occurs SQL
Server uses up a large amount of memory, as said before, but it doesn't
relinquish the memory that it used to make the updates.  And with each
update, SQL Server uses up a small amount of memory, but our main concern is
that somewhere down the road it will use up all of the memory on the serve.
The current version of SQL Server that we currently have is 7.0, with
Service Pack 1.0.  Is this something that is supposed to happen, or is this
a major problem?  I would be most thankful for any information anybody can
supply.