No, that is not true.
The 32-bit version of Windows XP and the 32-bit versions of Windows Vista and Windows 7 can only use a maximum of 3.5GB of RAM memory because 32-bits can on address that cessing memorymany memory addresses, but the 64-bit versions (Windows XP Pro is the only version of XP that has a 64-bit version) can address up to 128GB of memory.
When Windows runs out of memory, it uses its paging swap file located on the hard disk drive. Accessing a disk space is much slower than accessing memory, so the system slows down if the paging file has to be used.
Read this page on RAM memory for all of the information on it - http://www.pcbuyerbeware.co.uk/RAM.htm