"Oh, that's another question... does RAM use the first channel fully before starting in on the second?"
The system will simply see the RAM as one large array, and it will utilize it as such.
As for the 4GB RAM limit it isn't a 32 bit problem, it's microsoft just limiting maximum ram. Anything since the Pentium Pro supports PAE(Processor Address Extention) or PSE(as the Pentium 3 or later), giving you 36 bits of addressing. If you're running Windows with Data Execution Prevention, then you're even using PAE as the NX bit(required for DEP) is part of it. However Windows XP(and Vista 32bit) don't support PAE/PSE other then for the use of the NX bit. It also memory maps any I/O device on the address bus, meaning if your video card has 1024MB of RAM, that will be taken as part of the 4GB limit. Along with every other I/O device you have, hence why you'll never get 4GB of usable RAM in XP as every device you have has to be addressable via memory mapping on the address bus. Technically the hardware itself supports addressing for 64GB.
On a side note, TigerDirect as Cosair 2x1GB DDR2/800 kits for $10.