Depends on how good you are at modding. If you're pretty good, then I recommend:
OBSE and Oblivion Mod manager
OBSE is a script extender that is required to download most mods, oblivion mod manager makes downloading mods a million times easier. Neither of these affect the actual gameplay. Read the readme's included with the downloads for installation instructions if you aren't sure or are new to modding.
http://obse.silverlock.org/
http://www.tesnexus.com/downloads/file.php?id=2097
Oscuro's Oblivion Overhaul.
It improves the game in so many different ways it's too much to describe here, a total overhaul of what Oblivion was and improves just about every aspect of the vanilla Oblivion greatly.
http://www.oscurogamedesign.com/down-game-ooo-high.html
Natural environments
Doesn't seem like much just from looking at images, but in game it does go a long way towards making the world seem a lot more alive in game, with better weather effects, more foliage, improved trees, grass and far improved water. Cyrodil seems bland and lifeless to me without that mod now.
http://www.tesnexus.com/downloads/file.php?id=2536
Qarl's texture pack v3
Makes all textures 4 times larger, extremely noticable in cities, in combination with natural environments, this mod will make your game look like a game from 2011 rather than a game from 2006.
http://elderscrolls.filefront.com/file/Qarls_Texture_Pack_3;83706
Oblivion xp
A mod that pretty much does what it says on the tin, adds an xp levelling system instead of the "you get better as you go" style of vanilla oblivion. You know, that style that met jumping around for 10 minutes made you a grand master of acrobatics.
http://www.tesnexus.com/downloads/file.php?id=15619
A UI mod of your choosing
Scroll through tesnexus until you see a UI mod that you like, I can't really recommend one because it's all down to personal taste. I personally prefer to use DarN UI.
http://www.tesnexus.com/downloads/file.php?id=10763
Better cities
The cities in regular oblivion were all a bit bland, this mod makes them look far better. Take a look at the images on the link down below.
http://www.tesnexus.com/downloads/file.php?id=16513
Those are the mods that I use, browse tesnexus.com and see what mods you like. Be warned though, some of those mods will require a pretty good machine. I have 3.5 gb of RAM and a Radeon HD 6800 series graohics card and I can run these mods fine with only a small amount of lag here and there. The ones that will really eat up your machine are better cities, qarl's texture pack and natural environments. Avoid those if you have a machine with 1-2 gigs of RAM. Certainly not all three of those mods unless you have around 3gigs of RAM.
A very helpful website for optimizing the game to run better on your system at no graphical cost can be found here
http://www.tweakguides.com/Oblivion_1.html
WARNING: If you are planning to mod or especially muck around with .ini files to optimize the game, make sure you know what you're doing. If you don't know much about modding start simple, download Oblivion mod manager from tes nexus and work on some more simple UI mods before you get started on more complicated ones.
Have fun!
