yea, that sounds like the issue. Onboard video sometimes uses shared memory, wheer it takes memory from ram to make video run faster. It should be adjustable in the BIOS how much it takes.
since ur RAM is more than 256MB, why not make ur graphic card run at 64MB? Your Intel Graphic Extreme is a 200Mhz core speed Accelerator. So, with 64MB, you shld see better performance than a 32MB allowance. My 2 cents worth only.