Yeah. If you don't have a 64-bit OS then you're limited to 4 GB's of addressable memory (Addressable memory being your Ram, your GPU's ram, and page file)

If you have 3.5 GB available it likely means that you have 3.5 GB of ram, 512 MB of page file and NONE of your GPU's memory available. (AFAIK that was the order of operations for memory. It might be 3.5 GB of Ram and 512 MB of GPU, but I don't think windows will run without a page file by default)

You should get a 64-bit OS ASAP.