The best way to PyFFI is this (thanks to Tomlong and TES4POSItive for these instructions):
0: Back up the original Meshes BSA, and never lose it.
1. Extract the contents of the Meshes BSA to the directory Program Files/PyFFI/utilities/toaster/in
2. Remove the Trees and DistantLOD folders, leaving only the meshes folder in the in folder. Trees will be returned to the BSA later, but if you are using TES4LODGen, you can simply delete the DistantLOD folder.
3. Inside the meshes folder, remove the Characters and Creatures folders, optimizing these meshes can cause problems and can even decrease performance.
4. Right-click oblivion_optimize.INI and select Run PyFFI, go get some lunch while the spells are cast.
5. When done, all the optimized meshes will be placed in the out folder. You might want to consider leaving the unoptimized meshes inside the in folder so that if you find a bad PyFFI'd mesh, you can revert to vanilla and not simply ditch the whole thing.
6. Prepare for repacking, move the Characters and Creatures folders back inside the meshes folder and move Trees into the out folder (if no TES4LODGen, once more with DistantLOD).
7. OBMM can repack the BSA for you, open the BSA creator, select add folder, navigate to the PyFFI directory and add the out folder (NOT the individual folders inside, OBMM packs the CONTENTS of the folders, not the folders themselves), select your compression level (preferably none) and create the BSA. Name it exactly the same as the vanilla BSA.
All done.