In recent past while working on an assignment I have encounter an error 701 There is insufficient system memory to run this query . I had a quick look at the server and noticed that server is not configured proper for max memory, and have suggested client to make changes to the max memory settings for the server. While I've suggested changes I have quote two articles, thought they would be a help to you as well to understand better on how SQL Server Memory managed. An article by SQL Server MVP Jonathan Kehayias will help you understand the memory management very well.
1) http://sqlblog.com/blogs/jonathan_kehayias/archive/2009/08/24/troubleshooting-the-sql-server-memory-leak-or-understanding-sql-server-memory-usage.aspx
2) http://support.microsoft.com/kb/912439
-- Hemantgiri S. Goswami (http://www.sql-server-citation.com)
1) http://sqlblog.com/blogs/jonathan_kehayias/archive/2009/08/24/troubleshooting-the-sql-server-memory-leak-or-understanding-sql-server-memory-usage.aspx
2) http://support.microsoft.com/kb/912439
-- Hemantgiri S. Goswami (http://www.sql-server-citation.com)
