Why does the system only show 3.5 GB of memory when I set 4GB memory on the motherboard.

Because chipset architecture limitation, some kinds of motherboards designed memory support for up to 4GB in which the missing 0.5GB of memory address need to be reserved for PCI I/O space, AGP aperture mapping space and other onboard device I/O space. Thus you will see 3.5GB available on the POST screen.