i'm not sure how many people said this, but the radiant AI (what all the npcs have in oblivion) is very cpu heavy, that's why your slowest part of the game is in town, instead of the forests like most people. if you can swing it, get the core 2 duo e6300 and a mobo. fry's has been running deals with some core 2 duo and a free mobo (the proccy changes, although they just had an e6400 and a mobo with agp and ddr2 and ddr for 229 in my advert this morning)
see if you can pick one of those up, they will rock your sox in town. your gpu will be the only bottleneck for a while, esp if you oc the cpu.