32-bit Operating Systems (which includes most OSX, 32-bit *nix, and most Windows) have a hard limitation of about 4GB of addressable memory space.
Of the 4GB available to the OS, some of that memory is reserved for hardware communications, primarily the video card.
If you want to actively use 4GB or more RAM, you'll need to upgrade to a 64-bit operating system. There's a 64-bit release of Windows XP (which I don't recommend due to limited drivers). Vista also has 64-bit editions, but if you're going to buy a new Windows, get Windows 7. All retail editions of Win7 include both 32-bit and 64-bit versions - choose the 32-bit or 64-bit disc and get installin'!
You might have some old hardware that doesn't have 64-bit drivers. In my experience, these are typically add-in network cards, scanners, older printers (including fax/scan/print all-in-one doodads). Search for 64-bit drivers, and then determine whether you are willing to replace the devices with newer hardware.
There is also a chance that some older programs will not work with 64-bit Windows 7. I don't have a list, nor could I find a good list via Google.
I'll be making the 64-bit transition in the next couple of weeks, even though I don't have any computers with over 2GB RAM (yet).
