First of all I don't think it has all the DLC, but most of the important ones (so you'll be without *cough* horse armor *cough*). Its still a great deal though, so certainly get it if you haven't played Oblivion before.

Well first of all make sure to get the unofficial patches, for the base game and the two expansions. Other than that, most people like some sort of mod that changes the level up system, but you have quite a few choices in this regard, depending on your preferences. I personally use Francesco for this (it has options for additional weapons and monsters as well). For your second character I would get the alternate start mod as well. Then there are mods for the minor annoyances and improvements, like the toggleable item prompt (helps with inventory management), Elven Map Redux (colored world map), no psychic guards (stops guards from seeing you break the law through walls ) etc.

Look here for a decent list of mods.

Ha it actually comes with that horse armor pack. I heard about a mod that gets rid of the system that keeps leveling up the enemies as you level, allowing you to have a better sense of power. Any links to whatever that is?

Really? Hmm, guess I've had it the whole time and haven't realized it.

That's what I was referring to when was talking about the level up system. There isn't just "one mod" that gets rid of it entirely, but several that do it to various degrees and try to adjust it accordingly. Francesco for example keeps the general system in place but makes it so you level up slower (thus have higher skills and attributes when you level up) and sets a maximum level on all creatures as a way to try to keep the best of linear and dynamic level systems (so you can do some hard quests early but you don't have to worry about goblins still being able to be a challenge at level 20). The closest that gets rid of it entirely (that I know of) is to make attributes and your level increase slowly over time as you skills increase instead of all at once while giving enemies a set level. Point is there are a lot of mods that try to deal with the problem of dynamic leveling and none of them are perfect, so you just have to read the descriptions and try a few that you like.

In the link I have the ones that do this are under "Overhaul mods",  though its not exclusive to them (dynamic leveling mods used to have there own category, but they got rid of that for some reason).

IIRC, Oscuro's Oblivion Overhaul (or OOO for short) changes a lot of things in Oblivion to make it more like Morrowind.  E.g. enemie types and their levels are based on the area and not the player level.  That means you won't see every bandit or marauder suddenly parading about in glass or daedric gear simply because you reached level 'n' with your character.  There are also mods that upgrade your quest rewards since the vanilla game screwed you over for doing quests before max level.  E.g. a set of armor might be absolute junk at level 10, but the best gear in the game if you wait until level 50(or whatever the cap was in ES). 

Those two things go a long way to break up the nonsensical artificiality of 'progress' in Oblivion. 

Oscuro's Oblivion Overhaul is a MUST. It makes the game genuinely hard and removes the idiotic autoleveling. It's a scary world out there. Don't even think of starting the main quest; do a little bit of dungeon crawling first.

I know this is probably a little late, but I started talking to people still active on the Oblivion mod scene and appearently the must have mod is either FCOM (A combination of four overhaul mods, still in beta but a lot of people really like it) and Oblivion XP (turns Oblivion into an old school RPG where you get exp by fighting things/quests/even reading books etc., and then upgrading skills when you level up, not vice versa).

Sounds good! When I get oblivion I will check them out!

Fcom has been in beta for..years...lol

Is it still a pain in the butt to install?