Been playing Oblivion for an hour or so and tweaking some settings. Outdoors is fine most of the time, it's when you're using a light spell in dungeons that the framerate drops below what I'd consider 'smooth'. I'm using 1280*800 btw which is 16:10 ratio, same as the screen. None of the settings really help for indoor framerates though (tried shadows and specular distance) so I didn't really achieve much. It must be doing an extra texture pass or something when you're using light spells.
For under £200 I could replace my A64 with an X2 of some sort, and I believe Oblivion benefits from dual-core. Dunno if that's gonna be worth it though. If the game is fill rate limited, or pixel shader performance limited, in dungeons then it probably wouldn't help much.