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I have no experience with that cpu but you should be able to hit 2.8 just by raising the fsb to 400.
that cpu most certainly limits a gtx460 at 1680x1050 especially in games that don't use more than 2 cores. just because you don't realize it doesn't mean its not happening. now there's is nothing that wont be playable but still quite a bit of performance is lost compard to having a faster cpu.
that cpu only has a multi of 7 so I doubt very many people are hitting well over 500 on the front bus when overclocking those cpus. he would probably need better memory and certainly a better cooler for speeds above. I suggested 400x7 as a very easy overclock that would require no skill, probably no voltage change and allow him to keep the stock cooler. that would probably eliminate 90% of any bottleneck that would occur while using a gtx460 at 1920.
the amount of vram is not the only difference. the 1gb card has 256 bit for more memory bandwidth and more rops. for your cpu and res though the 768mb model is the better choice IMO especially since it can usually be found for MUCH cheaper. the only way I would suggest a 1gb model for you is if you find a really good deal. no matter which one you go with make sure you oc to 2.8 like I mentioned earlier to help get as much out of the card as possible.
I would not spend any money on upgrading the cpu for that platform. the cpu you have now is pretty decent anyway and all you need to do is oc it. at 2.8 it will give you almost all of what the gtx460 768mb is capable of at settings you are likely to run. in other words unless you are running just medium and below settings then a faster cpu than yours at 2.8 isn't going to do much of anything in 99% of cases.
that makes no sense in the context of this thread though. he is not looking for something like that and his cpu would be a pretty large limitation for that level of gpu power and overhead.