Actually, it technically does not free up the RAM.
Here's the deal from what I understand. In older operating systems and on some older video cards (the problem has had a design work around in
Windows 7 and on newer graphics cards) the operating system still had to reserve the same amount of RAM as the video card has memory so that it can copy all the data held in the video card cache to RAM if the actual CPU needs to process the data. This was because the CPU could not directly connect to and access data stored in the RAM on the video card itself, and for some operations this data would have to be sent to the CPU for calculations and not just used by the GPU on the graphics card. This means that you'd be losing some space (even if it wasn't directly visible) in your RAM for it to process tasks from your graphics card. The good news is most newer platforms were smart enough to detect the presence of a dedicated graphics card and would disable setting aside RAM for use with the integrated graphics card, which wouldn't be used of course.
This effect was especially noticeable on a design
computer we had recently. It was a dual-processor system running two AMD Opteron processors with 4 GB of DDR2 667 ECC Registered memory on a workstation motherboard supporting SLI graphics card configurations. After installing two graphics cards with just over 512 MB of memory in SLI (and memory reservations for other system requirements) the OS was only able to actually work with 2 GB of RAM (3.25 GB from
Windows XP 32-bit minus a little over 1 GB from the two cards in SLI).
Again, I believe this is something that has been addressed and resolved in
Windows 7 and with newer graphics card drivers.