Solved! Go to Solution.
Maybe I'm not telling anything new
Don't edit the registry directly... Instead, use the "AdvancedArcMapSettings.exe" registry editor - typically stored in the C:\Program Files\ArcGIS\Desktop10.0\Utilities folder.
The errors were more likely due to size limitation of ArcGIS than my computer components. I've since found a workaround for the DEM where it's no longer a 1+ GB file (although my coworker recently informed me that it IS possible to process a DEM greater than 1GB). I would imagine your setup is quite adequate for what you're doing. For comparison purposes, the coworker that recently discovered it was possible to process a DEM greater than 1GB, is using a laptop that is more than several years old, which I would guess has a similar setup as your desktop.