OT: Since when did the mount of VRAM of a dedicated graphics card affect how much RAM the system could use for the OS based on the address width? Especially since a 32-bit system can address more than 2GB? lol wut?
Normally if you boot up with 8GB of RAM in 32-bit mode, Windows and all the hardware will roughly grab a GB or so address space for its own use leaving you with about 3GB of usable ram. (Out of 4GB max it can use at boot.) If you have a 2GB vid card .... you might have as little as roughly 1 to 1.5 GB of usable RAM in your system.
That might be what all the thrashing is about. Upgrading to a 64-bit OS might just solve all your problems.
Does your z68 motherboard support the cpu graphics? If so, try taking out your vid card and just using the integrated graphics. Does the thrashing go away?