I spent about half a day researching the causes of music not working in Oblivion before finally finding a solution. I narrowed it down to being some kind of codec error, but no matter what I disabled, I couldn't get the sound working. I refused to uninstall codecs outright as I'm pretty paranoid about getting them to work right and messing with them as little as possible and I wasn't THAT eager to get Oblivion to work -- but then again, this is probably the only game related issue I've had out of countless games.

I tried the bmusic/sound acceleration/various options but to no avail.

Here's what I did:

I determined it was some kind of mp3 specific codec (no video problems) based on the similar problems other users were having. I tried re-registering the default mp3 Windows codecs, but with no success.

First download the codec tweak tool that normally comes with the K-Lite Codec Pack. This is a very useful tool for anything codec related to be honest.

http://www.free-codecs.com/codec_tweak_tool_download.htm

Run the standalone exe file. You will come up with several options. I'm guessing the 'fix' codec problems could be a method but it's not what I did.

Only select "Generate list of codecs...."
Accept the default options on the next page.

Notepad should open up with a generated list of codec filters and such.

Scroll down to ***Default source filters (32 or 64 bit)***

Look at what your default source filter is for the mp3. For me, using Windows XP SP3, I had a unique registry entry (second column) with my source filter labeled as [invalid]:

.avs {D3588AB0-0781-11CE-B03A-0020AF0BA770} AVI/WAV File Source
.bmp {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.dib {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.dvr-ms {C9F5FE02-F851-4eb5-99EE-AD602AF1E619} StreamBufferSource
.flv {E436EBB5-524F-11CE-9F53-0020AF0BA770} File Source (Async.)
.gif {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.jfif {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.jpe {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.jpeg {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.jpg {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.m2ts {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.m3u {e436ebb5-524f-11ce-9f53-0020af0ba770} File Source (Async.)
.mka {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.mks {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.mkv {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.mp3 {C7A24F96-CE96-4F2D-BBDC-08586B449AC3} [invalid]
.mp4 {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.ogg {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.ogm {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.swf {E436EBB5-524F-11CE-9F53-0020AF0BA770} File Source (Async.)
.tga {7DF62B50-6843-11D2-9EEB-006008039E37} Generate Still Video
.ts {55DA30FC-F16B-49FC-BAA5-AE59FC65F82D} Haali Media Splitter
.wv {E436EBB5-524F-11CE-9F53-0020AF0BA770} File Source (Async.)
.wvc {E436EBB5-524F-11CE-9F53-0020AF0BA770} File Source (Async.)

I found out online that this should be labeled as File Source (ASync), or at least probably the same as .flv, .m3u, .wv.

I have no idea what the wierd registry entry was related to, but I thought to try and change it to one associated with File Source (ASync). I simply went to regedit (exported a backup in case), did a search on {C7A24F96-CE96-4F2D-BBDC-08586B449AC3} where it found two entries. I right click->modify data and change the values to {E436EBB5-524F-11CE-9F53-0020AF0BA770} in my case. The entries for you might vary. Apparently doing this for one of the entries automatically changed the other.

I opened up Oblivion and the music ran perfectly fine.

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This is just one of countless possible solutions, but I thought I'd share cause this was painful for me to fix. It's not even really a fix since I have no idea what File Source (ASync) is pointing to or how to do it outside of regedit, but whatever works I suppose. Maybe someone can elaborate.