Get at minimum, GOTY. It contains SI, Knights, and is patched already to 1.2.416.
If you want the DLCs. try to find a Knights CD. It has all the DLC's except for Frostcrag (I think).
No, the knights cd has all DLC except battlehorn castle.
It is common knowledge that to get the most out of mods, you will want to have at least SI as a lot of content comes from there. In terms of KOTN and the other DLC, all that you need to be aware of is that the majority of mods that require these are usually just re-vamps of the original DLC, e.g. Frostcrag Reborn is an amazing mod that adds and changes so much of the original DLC, frostrag spire. To answer your question, vanilla means an un-modded and 'pure' oblivion no DLC's or SI.
Quick Tips and pointers:
You will probably want to download some of the more important mods first e.g. the unofficial patches. After that you will want to learn using the common utilities of any modded game (OBSE, OBMM, BOSS, Wrye Bash) next you go mod-hunting, find whatever suits your tastes and wants, one of the best places to look for mods is tesnexus, a website devoted to tes related mods and other stuff.
YOU MUST READ THIS PART!!!
Please, please, please do not download or use a mod without reading the description, comments and readme files (yes all of them!) you have no idea how many questions are asked which could have been answered by these, just read whats written and you will be fine, learning to use mods takes a bit of patience and a lot of common sense, all of what you need to know is already written for you. So have fun