If you are running the 32-bit version of XP, which you almost certainly are, it can't use more than 3 GB of memory. You can have 8 GB of physical memory, but it will only see 3.
You could install Windows 7 64-bit. This is not an in-place upgrade, you would have to wipe the drive, or get a new one, and do a full install. You could also use the extra GB as a RAM drive if you need some fast scratch space.