Using a 492 fb(-1) data sample collected near the Y(4S) resonance with the Belle detector at the KEKB asymmetric-energy e(+) e(-) collider, we observe the decay B-0 --> p (p) over barK*(0) with a branching fraction of (1.18(-0.25)(+0.29)(stat) +/- 0.11(syst)) x 10(-6). We study the decay dynamics of B-0 --> p (p) over barK(0) and compare with B+ --> p (p) over barK*(+). The K*(0) meson is found to be almost 100% polarized ( with a fraction of (101 +/- 13 +/- 3)% in the helicity zero state), while the K*(+) meson has a (32 +/- 17 +/- 9)% fraction in the helicity zero state. The direct CP asymmetries for B-0 --> p (p) over barK*(0) and B+ --> p (p) over barK*(+) are measured to be -0.08 +/- 0.20 +/- 0.02 and -0.01 +/- 0.19 +/- 0.02, respectively. In addition, we report improved measurements of the branching fractions B(B+ --> p (p) over barK*(+)) = (3.38(-0.60)(+0.73) +/- 0.39) x 10(-6) and B(B-0 --> p (p) over barK(0)) = (2.51(-0.29)(+0.35) +/- 0.21) x 10(-6), which supersede our previous measurements.