It was still happening for me, and I investigated into a kernel patch (landed 
in 2.6.36.2) yesterday.
This did not help on it's own, but I had to change GRUB_GFXPAYLOAD_LINUX=keep 
to GRUB_GFXPAYLOAD_LINUX=1280x1024, see: 
https://bugs.launchpad.net/ubuntu/+source/linux/+bug/605837/comments/9

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You received this bug notification because you are a member of Ubuntu-X,
which is subscribed to nvidia-graphics-drivers in ubuntu.
https://bugs.launchpad.net/bugs/607490

Title:
  Xorg fails with "NVIDIA(0): Failed to allocate primary buffer: out of memory."

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