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My problem is the most similar to the original poster. I am attempting to open 289MB jp2 file in Photoshop CS. Running XP Pro on the dual Athlon machine with 2GB memory and about 70GB free space on HD. Most replies failed to address that the system reports only small part of the memory used! Original poster mentions 552MB out of 4GB, in my case 570MB out of 2GB!
Hence, there must be some setting or bug that starts this error although the system actually can handle memory request.
That is the amount of RAM that you have allowed PS to use. There is a setting in the preferences which specifies the amount of physical memory that you are willing to let PS use. It isn't hard to find the setting.
The usual amount is 50%. Yours is about 25%.
25% is too little. Using much more than 50% can slow the entire operating system to a crawl.
PS can always use the full amount of virtual memory, and it can always use the scratch area as well. It might need as much as 7 times the maximum size image that you are editing. So, it isn't surprising that you have troubles.
Jim