I had the same problem too
My system is
Athloon 64 3200+
1Gb ram
Shuttle SN95v3
eVGA 7800GS OC
fairly mid-range...
and i was able to achieve visual that almose rivals the screenshot that's on the box and the official sites, maintaining frame rate at around 30-40 outdoor with occasional dip into the 20s and 40+ frams in the dungeon no problem (4x AF with LOD and Normal Map Patch). and the turning problem usually only occurs while switching to a new area and a few spin of mouse will usually solve the problem.
Check out this link
http://www.elderscrolls.com/forums/index.php?act=ST&f=25&t=299166&st=0
one of the screenshot he made for comparison
http://img114.imageshack.us/my.php?image=oblivion5e8sp.jpg
download those ini files to your "My Document/My Games/Oblivion/" folder and replace the oblivion.ini as you see fit. Not only will it improve your frame rate.. it will make your game look a lot nicer as well..
** Important: Read the instruction before you change the ini file. Inside your ini, there's 4 lines of variable. Specifically
uVideoDeviceIdentifierPart1=
uVideoDeviceIdentifierPart2=
uVideoDeviceIdentifierPart3=
uVideoDeviceIdentifierPart4=
right under [Display] (line 92)
Copy from your original oblivion.ini to the new one. It will prevent the game from redecting you card and change the variables. Also.. Do NOT set the readonly bite on the ini file. It's proven to cause crashes.
after you downloaded the ini above there's a couple of variable you will still need to tweek a couple of variable inside. depending on the amount of ram you have in your system, you can decrease amount of lag quite a bit by increasing the iPreloadSize which is defaulted to 256mb. You will see quite a performance boost by pumping up that variable to 512mb+ (mine's set to 805306368) or even 1GB if you have more then 1gb of ram. Also one more variable to watch for is "bUse Joystick=1" change the value to 0 if you are crashing often.
You might also want to enable your bDSoundHWAcceleration to 1 if you have the soundcard to support it but that that had proven to be buggy for a couple of people.
on the same forum there's also a thread with mods that will definently help with your visual.. specifically, the LOD patches which increase the detail how the farside landscapes are rendered with close to none performance hit
Here
http://www.elderscrolls.com/forums/index.php?showtopic=324335
are quite a few helpful mods that will make your game much more enjoyable.
I did not bookmark the post for the normal map patch.. but you should be able to locate it in the forum as well. Asking around will also help as the forum is filled with activity (some people's post got pushed all the way to page 10 in matter of hours).
It tooke me quite a few days of looking around the forum to get the game running great and the effort was worth it. I'd almost say you cannot play this game without the helpful forum that constantly offers great mods and comments.
Enjoy and "Go Hurt Something"
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edit: some variable names and some note on replacing the ini file.