I have this very strange lag when I encounter enemies.. I have latest patch for Shivering Isles also latest drivers for my video and audio.
CPU: Pentium Dual-Core E5700 @ 3.00 Gz 3.50 GB of RAM, Video: Nvidia GeForce GT 440 OS: Windows XP SP 3 x32.
So I've tried reinstalling the game, to run it from highest to lowest options, still the same problem. The FPS goes around 60 all the time and it drops only by 4-5 when this lag occurs, and only when fighting enemies.. I run Skyrim on the same CPU whithout any issues on High graphic options. Please help! I've also tried the 4gb patch from ntcore (I've red some forums that people solved Oblivion lags with it) still nothing, I'm stuck..

Edit: I forgot to mention that I have not installed any mods or unofficial patches and I have all official DLCs.

Kill off some of your background processes when you want to play.

What exactly do you mean by that? I don't run any resource consuming processes. The CPU doesn't go over 1 % usage even with Firefox, Avast and Spybot S&D in background. The strange thing is that Oblivion itself runs perfectly with maxed out graphics until I enter a fight with creatures, I also noticed that this stutter is even harder when I fight rats. So any ideas?? If really a background process could do this what it might be?

Have you tried turning off the music in your Oblivion.ini (bmusicenabled=0)? Some integrated sound cards have a problem, and cause lag when the battle music happens.

That didn't solve the problem.