I installed the Immersive Interface mod for Oblivion found here:

http://planetelderscrolls.gamespy.com/View.php?view=oblivionmods.detail&id=717

I chose to have small font for the arrow count/display. And I don't see any arrow count at all when I have a bow and arrows equipped. Do I need to reinstall it with large font?

Check the font size. Try using the default option for the arrow count text size. If you want small font, I think you need to use a UI mod that support small font in tandem (i.e., DarN and variants.)