Thats tends to be the case anyway, that it'll read the correct amount, because its a seperate part of the RAM that stores the information of how much it has in it.
The main chips on the RAM though is what the data is cached to, etc, and if one of these chips is faulty, then you get the errors you describe, blue screens, etc.
I'm pretty sure. One way to check would be, if you had 2x 512mb to make 1GB, you'd take one out and test it, and if that works, swap and try the other to find the culprit.
But yeah, a replacement is needed
Nice processor you have there by the way