As an Oly user I can say the 4/3 system is excellent, I have an E520 and an E3 and I have no issues with the quality of the images what so ever, some folk will tell you the noise at higher ISO values is a problem but in reality it's not, I have taken many shots at higher ISO's and they are fine.
The E420 is a great camera, it's lacks the image stabilisation of the E520 and up but it is a small compact and very competent camera. It has been superceeded by the E450 recently so you may want to look at that although I'm not sure of it's specs.
The Oly kit lenses are very good, quite possibly the best kit lenses available and if you want to upgrade to better lenses the Oly Zuiko range has a great focal length selection and the lenses are amongst the best you can buy. Although the after market lens selectionis pretty much limited to Sigma.
The 4/3 system results in a 2x magnification factor (compared to full frame or 35mm film cameras) so the standard kit lens (14-42mm ) is the equivilent of a 28 - 84mm in full frame or 35mm terms, (Canon are 1.6 x and Nikon 1.5 x for their cropped sensor cameras).
Personally I'd say the E420 is a great camera to start out with although if you can either stretch your funds or buy one
second hand the E520 may be preferable.
Paul