The situation is your OS. 32 bit operating system handdle at max 3.5gb of ram, but mostly uses 3gb, leading that more than 3gb a waste of resourses, upgrading your OS into a 64bit will let you use 4gb rams completly fine, even more.
Some of your ram is going to be "reserved" by the Windows OS. How much......depends on installed hardware, etc. Those restrictions/limits on the 32 bit OS are the reasons that most of us go to the 64 bit OS. 32 bit OS is limited to not more than 4gb of ram and you're lucky if you end up with 3gb useable. With 64 bit OS you can install 4gb of ram with no problem. You could load as much as your mbod can handle. I have 16 gb loaded on my machine. Even if your laptop is limited to 4gb of ram, at least you would be able to use it all. it's a easy upgrade to go to the 64 bit OS. My copy of Windows 7 came with both install disks. 32 and 64 bit. The only sad part is, yes....you'll have to start over. Good luck.