Windows XP does not recognize more than 3.25 gigs of RAM.
This is because XP is a 32bit operating system, so the maximum theoretical amount of recognized RAM is 2^32= 4GB. Subtract some overhead (someone else here is sure to be able to explain what that overhead is exactly) and you're at 3.25GB.
If you want to make use of all your available RAM, or install more, then you will need to use a 64bit OS.
Hope this helps.