Recently while working on a large project, I've had a friend prepared to do some playtesting. His game is patched and everything appears, as far as I can tell, to be up to snuff. The only difference between our two games is he runs his off Steam and I run mine off a disc. The strange thing is though, it's not finding the Data folder that is a problem, it's when he actually attempts to activate the plugin he gets an error saying it is not an actual Oblivion .esp or .esm. I've tested the plugin on another computer of mine (running it off of a disc as well) and it works fine there. Is there some magic thing I have to do to get this to work with Steam?

Other mods work for him, but mine seems not to.

Remove extraneous punctuation from the file name of the plugin. You probably use a mod manager of some kind (Wrye Bash or OBMM or the like) and he might not. Mod managers won't complain about punctuation in the plugin name, but the default launcher will. Ampersands, apostrophes, underscores, commas, and hyphens are all safe; but anything else (including parenthesis) should be removed.