I wouldn't get the XBox360 since it's a lot easier for the many problems to get fixed on the PC. Although the game does have a nuber of bugs, there are user-made plugins fixing many of them, as well as lots of things that can be done to help performance. I suggest everyone playing it read the guide on
www.tweakguides.com. I'd already thrown a good sixty hours into the game, so I clearly haven't found the bugs to be a show-stopper at all. I never even played Morrowind or the other prequels.
As for performance, the game will run great on that system. I have it with Large textures, 1280x1000 (can't quite handle my lappy's 1400x900 native), HDR, and high stuff on most of the other settings. The laptop has an overclocked GeForce Go 6800, a 1.73GHz Pentium M, and 2 GB of RAM. It doesn't perform really well, but it's playable at those settings. Your system would be somewhere in the area of twice as powerful graphically, so I doubt you'd have any problesm.
I'd also agree with matm347 and say you should get a 165 or at least something dual-core. Any dual-core processor is almost guaranteed to hit at least 2.5GHz with good air cooling (a Thermalright XP-90 being one of the best air coolers around).
I also really think you should go with 2GB. Although I'm not convinced it does much besides help loading times in Oblivion, it is quickly becoming the high-end standard. Other games do get big advantages from that much RAM, and upcoming games will as well.