There a 2 resource heaps, (user and GDI) that are 64k big that windows uses to keep track of what programs are open, how they are displayed, what processes are running, etc. They are fixed in size so adding ram doesn?t help increase the resource heaps. A well behaved program should release the memory it uses in both ram and the resource heaps when it is no longer needed so other programs can use it but too often they refuse to release all the memory or resources so you eventually get an "out of memory" or "out of resource" error message. This is commonly referred to as "memory leak"
Windows will see and use more than 128 megs of ram. I have 256 megs and as I type this windows is using 160 megs, (I have several large programs running at the moment) so don?t worry that you wasted your money on ram, Windows will use it, especially if you use large memory intensive programs and it will improve performance since Windows wont be paging out to virtual memory as often.