The only way to address all of the RAM you have installed is to use a 64-bit OS (or use other extensions such as PAE - totally not worth the hassle). You're seeing the common issue that other 32-bit users have been complaining about for years. This is why you often see people telling you to just start with a 64-bit version of Windows these days, there's no upgrading from 32 to 64-bit. It's an OS reinstall.
The same key used for the 32-bit install will work for a 64-bit install. The installation key is not bit specific, so if you want to change bit versions the same key will work. Just remember keys are specific to the edition of Windows installed so you would need a Windows 7 Ultimate 64-bit install disk for the key to work.
Its not a lie, the rest of the 4G is being used for other things. Its a 32-bit limitation, everything has to be addressed within 4G, including system RAM.
I thought that with Vista SP1 and beyond the system would still report 4GB despite what it can use. Yes I realize the whole 32bit 4GB issue, but Microsoft issued what amounts to a 'cosmetic fix' with Vista SP1 (pretty sure thats when it was) so that 4GB would be reported when in the System control panel.
I think he has other apps showing him that he's not addressing all his RAM.
Not that it matters since I think the issue has been explained above but what does the system control panel say?
Other things to look for.
Here is an informative discussion of this issue with *possible* ways to wring out the "missing" gigabyte:
1. http://en.wikipedia.org/wiki/3_GB_barrier ; and,
Is this a laptop? Do you have an integrated gpu? If so, that is shared with RAM total.