It's all about address space, not just RAM size. Every component (vid card, sound, motherboard controller chips, etc) in a system takes a block of addresses, as well as some overhead addresses for Windows to be able to operate.
A 32-bit OS can only "see" 2^32 = 4,294,967,296 (4GB). Since your system is using about 1.25GB worth of address space (not including your RAM), there is only about 2.75GB worth of addresses to be assigned to your RAM. So, to answer your question - the extra 1.25GB of RAM that you have that Windows can't see - is not being used at all as there are no address spaces left to assign to it. Without an address, Windows can't see it - let alone use it.
A 64-bit OS is 2^64 = 18,446,744,073,709,551,616 (18 Exabytes). This is the theoretical limit for a 64-bit OS. It's theoretical, as nobody is going to make anything with 18 Exabytes worth of trace lines. Most Mobos are limited to 4-8GB of RAM- probably will increase soon, but not to 18 Exabytes.
If you're interested, here is a brief Wiki article on address space:
http://en.wikipedia.org/wiki/Address_space