I've already ordered a 4GB module

But it's not it. I've tested and memory gets just to 80, sometimes 87%, that is when OB is around 1.2GB, then crashes.
It's still possible your CTD at 1.2gb isn't related to a memory ceiling. 80 - 87% isn't exactly a consistent number.
Suggestions... Make sure you aren't using a PCB mod. If you have OSR, remove it temporarily as it will slow
your memory fill rate. Basically, get Oblivion down as close to Vanilla as you can.
When you test, it is best to try and remain in a single cell. Try doing what others have done and create many clones
of your character while watching your Oblivion.exe memory process increase. Staying in a single cell helps
reduce the likely hood of any other mods interfering with your test. Also, when you switch cells, memory that is
cached is typically unloaded in order to make room for the new cell. So, it will take longer to reach your memory ceiling
if you are moving from cell to cell. Try just staying in the water front just across the bridge from the center tower.
That's a good cell to test in.
Make sure that you have as much background applications stopped or disabled as you can. The only things that should
be running during the test is Oblivion and your task manager. Please don;t base your total memory as a means of
what Oblivions process memory is. Just stick to watching the Oblivion process.
YOu can even go as far as disabling your explorer.exe from the task manager before loading Oblivion. YOu can run explorer.exe
from the taskmanager to bring it back once you are done testing. Oh, and be sure you are in window mode.
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UPDATE - 256mb ATi 3450 w/ 4gb of ram on Win7 32-bit no LAA - After trying to push the VRAM as far as I could, I finally hit the
memory ceiling for Oblivion.exe - The total VRAM reached 975mb and the total Oblivion.exe memory reached 1.75gb This confirms
that VRAM is working completely separate from the Oblivion.exe memory process. Others already knew this, and I myself suspected it
but I'm the type to want to see something first hand before I just decide if it's correct or not. Interestingly, The automatic memory cache
purge ran right at those amounts listed above. Most likely triggered by the 1.75gb of ram use on Oblivion.exe. I wonder if this will happen
in the XP test on the same hardware? Another interesting fact... I never crashed during cell switching or running any PCB commands. Although,
the lag and stutter became unbearable. Oh and another note, not sure if I've mentioned this before. When the auto cache purge kicks in,
it purges both the VRAM and Oblivion.exe process memory usage.