The memory that is being reported is the memory available for the DOS prompt session. Each DOS session from Windows is allocated a "chuck" of memory. Other OS stuff may be occupying memory as well (e.g. disk cache).
If you're using Win9x, IIRC MSINFO (or Properies under My Computer) can tell you what Windows see as your memory available.
On your memory problems, if your Window programs are complaining about insufficient memory, you may need to increase your virtual memory. For DOS programs, you may have to look at the properties of the DOS window (or create a .PIF with certain memory requirements). Another possibility could be bad memory hardware. Good luck.