Here's the problem. Your GPU does reserve some VRAM, plus you have background stuff running... usually with no programs open just in Windows you'll be close to 1gb used. Now, Windows can use "file paging" which means storing RAM stuff on your hard drive, but of course this is a serious slow down. HDDs are around 1000x (more, actually) slower than RAM so you see your system being sluggish.
4gb is the least amount you should consider using these days, especially with 1gb video cards.
Other than that, should be a decent system if you upgrade to that E7200.