The exact mechanism of data storage in the brain is still unknown. There are roughly 100 billion neurons in the human brain; if each neuron represents 1 bit of storage, then the brain's capacity would be around 12.5 gigabytes. However, each brain neuron is connected to thousands of other neurons, forming a total of 10^14 to 10^16 synapses between neurons. Each synapse has a variable firing threshold, expanding the potential data storage; and if memory is encoded in synaptic connections, the brain's total storage capacity could be on the order of 500-1000 terabytes, which is the figure you cite in your question. It is also possible that data is stored on a molecular level; in this case, the storage capacity would be orders of magnitude greater than for synaptic storage.

The peripheral nervous system consists of an additional 100 billion or more neurons, about the same number as the brain itself. Assuming whole-body versus brain-only neural memory, this would double the storage capacity of a neuron-based binary storage system from 12.5 to 25 gigabytes. Since most peripheral neurons transmit signals to only a single adjacent neuron, any contribution by the peripheral nervous system to total memory capacity in a synapse-based storage system would add only a tiny fraction to the brain's memory capacity (12.5 gigabytes versus 500-1000 terabytes).
Source(s):
http://www.geocities.com/rnseitz/The_Great_Gray_Ravelled_Knot.htm
http://hypertextbook.com/facts/2002/AniciaNdabahaliye2.shtml
http://scienceblogs.com/twominds/2008/07/the_capacity_of_the_human_brai.php
http://www.merck.com/mmhe/sec06/ch076/ch076d.html

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