(Originally posted by Mod_JColick)
 
Ok seems that this question keeps popping up over and over so to clear things up heres a blurb about a 32Bit O.S. and 4Gb of RAM. This applies to XP 32 Bit and Vista 32 Bit.

If a computer has 4 gigabytes (GB) of random-access memory (RAM) installed, the system memory that is reported in the System Info dialog box in Windows XP/Vista will be less than you expect.

This is a NORMAL and an EXPECTED Condition.

Various devices in a typical computer require memory-mapped access. This is known as memory-mapped I/O. For the MMIO space to be available to 32-bit operating systems, the MMIO space must reside within the first 4 GB of address space.

For example, you have a 8800GTS 640Mb Graphics card. That cards memory MUST be mapped withing the first 4Gb of address space. If you have 4Gb of memory installed then part of the addresses are reserved for the graphics card memory map. The graphics card memory now OVERWRITES a part of the system memory. 4Gb = 4096Mb - 640Mb = 3456Mb. If you have 2 GTS 640Mb then the amount of TOTAL RAM available to the O.S. becomes even less and so on. The amount system memory is reduced is all dependent on the amount of devices installed in the system. However, to avoid potential driver compatibility issues, the 32-bit versions of Windows XP/Vista limit the total available memory to 3.12 GB.

For Windows XP/Vista to use all 4 GB of memory on a computer that has 4 GB of memory installed, the computer must meet the following requirements:

1. The chipset must support at least 8 GB of address space. Check with your Motherboard Manufacturer to see if your chipset supports this feature.
Chipsets that support AMD processors that use socket F, socket 940, socket 939, or socket AM2. These chipsets include any AMD socket and CPU combination in which the memory controller resides in the CPU.

2. The CPU must support the x64 instruction set. 

3. The BIOS must support the memory remapping feature. The memory remapping feature allows for the segment of system memory that was previously overwritten by the Peripheral Component Interconnect (PCI) configuration space to be remapped above the 4 GB address line. This feature must be enabled in the BIOS configuration utility on the computer. View your computer product documentation for instructions that explain how to enable this feature. Many consumer-oriented computers may not support the memory remapping feature. No standard terminology is used in documentation or in BIOS configuration utilities for this feature. Therefore, you may have to read the descriptions of the various BIOS configuration settings that are available to determine whether any of the settings enable the memory remapping feature.

4. An x64 (64-bit) version of Windows Vista must be used.    

A word of warning about forcing PAE:
Ususally forcing PAE mode on a currently installed O.S. will result in having to reformat and re-install the O.S. ( Ya tried it as an experiment and it hosed the O.S.)

Some drivers might not load if PAE mode is enabled because the device might be unable to perform 64-bit addressing. Or, the drivers might be written with the assumption that PAE mode requires more than 4 GB of memory. Such drivers are written with the expectation that the drivers will always receive 64-bit addresses in PAE mode. 

Other drivers might load in PAE mode but cause system instability by directly modifying system page table entries (PTE). These drivers expect 32-bit page table entries but receive 64-bit PTEs in PAE mode instead. 

Sources MS KB 929605 and Experience