There are severe problems with Lombards with higher than 384MB total RAM installed for Panther, involving video meltdown when high CPU tasks are run (such as repairing permissions). Discussion on the issue at MacFixIt.com and Apple forums.
It can be defective RAM or a defective slot. You can try putting the RAM in the other slot and see if it also reports the wrong amount. If it does, it is most likely the RAM and you can return it for an exchange or refund. If it reports the correct amount in the other slot, there is most likely a problem with your processor card on that slot and it'll report all RAM in half.