Under Windoze, a single application cannot access more than 2GB of memory, so photoshop as an application is limited to 2GB. Windows itself can use more than 2GB of memory, and so if you have more than 2GB, either Windows will use the extra, or if you run more than one application, windows can let each application use different '2GB chunks' of memory so that you're not wasting your time installing say 4GB. However, Windows itself can't address more than 4GB.
You won't see any change to this until you switch to the 64-bit version of windows-xp, and have a processor that can handle 64-bit addressing. Believe it or not, the latest P4 CPU's have some 64 bit extensions. Of course, you will also require Adobe to provide a 64-bit version of photoshop too...