We are aware that 'free' is reporting the RAM inaccurately with Karmic and the new kernel. We are looking into it and we'll have it resolved just as soon as we can.
Sorry that you are not actually getting the RAM reported :(
The 2.6.32.1 helps with this issue - it is an upstream bug which has not been resolved yet (https://bugs.launchpad.net/ubuntu/+source/linux-ec2/+bug/510243).
I know it is annoying but it is purely cosmetic - it does not affect the actual RAM allocation.
We are testing the kernel in our testing environment and I have just spoken to the Systems team - we should be able to get the new kernel out as soon possible.