I think that 1GB of VRAM would reduce the total addressable RAM for 32-bit systems, or so I've heard.
The more VRAM you have, the less addressable memory is available, so it would reduce the absolute maximum to 3GB. I'd expect a 32 bit system with a 1GB video card to be able to see about 2-2.5Gb of RAM, of course it depends on the other hardware.
A lot of people will say extra VRAM is useless, but as I said, a lot of reviews don't show sudden framerate drops (stutters) and the minimum framerate plays an important role in smooth gameplay. Also, a trick that's often played is a lower end card like an 8600GT with 1GB of VRAM, trying to make people think it's better. The card needs to be pwoerful enough to actually properly use the extra VRAM - on an 8600GT, anything above 256MB isn't really worth it because the card just isn't that powerful. Plus, often the cards with extra VRAM use DDR2 rather than the faster GDDR3/4/5.
Here's a real life example for you - my system can handle Crysis on all high settings, minus AA/AF. However, because I have "only" 512MB VRAM, if I play on all high I get a massive stutter every few minutes as the VRAM fills up, and the game is unplayable for 5-10 seconds. That ruins the experience really, so I had to drop just one setting down a notch, and it's all good now. If I'd got a 1GB 8800GT, I wouldn't need to drop any settings.
Anyway, hope this helps clear things up a little.