Here's the official explanation:
http://support.microsoft.com/kb/929605/en-us
http://blogs.msdn.com/dcook/archive/2007/0...-my-memory.aspx
Depending on the system, Windows will see between (approximately) 2.6 to 3.6 gB of RAM on a 4 gB system. With Vista SP1 the number in the System dialog has been updated to reflect installed RAM (rather than accessible RAM) - so, if you've got 4 gB, you'll see 4 gB.
But as the explanations above state, there is some overhead that takes up this RAM. The switch to 64 bit will enable you to use all of it, but writeups that I've seen say that there's no practical advantage to having either 32 or 64 bit with 4 gB of RAM. You will notice a difference with 8 gB of RAM tho'
FWIW - I've had 4, 8, and 12 gB of RAM with Vista and find that there's no appreciable difference in performance over 4 gB (for the uses that I put it to). You may notice a benefit if you constantly run apps that normally consume boatloads of memory. What benefit I get from it is the ability to leave lot's and lot's of stuff open, and still be able to function quickly (I can play video games without closing any of the multitude of applications that are open on my Desktop.