But if you read the mod install guide, why did you drop the zipfile--the archive--into your Oblivion folder? I just downloaded the mod you're referring to. (I'm assuming you followed the instructions online, and only downloaded the 1.5 version.) Here's what you want to do:
Oh. When they said they extracted I assumed...yeah. Nice catch
And yeah OP...figure out where your oblivion game is installed. What system are you on? XP, Vista...? If you installed it to the default it's probably somewhere like C:\Program Files\Bethesda\Oblivion or if you have the steam version it's C:\Program Files\Steam\steamapps\common\oblivion.
Please note I'm not on my computer and going from memory here, so YMMV.
EDIT: Then...again, you didn't put it in the correct place. Where exactly is your game installed?