I love the concept of the Shademe plugin, adding dynamic shadows back into Oblivion. However I'm stumped as to how to get the proper ini settings so that A: The game doesn't become unplayable and B: the shadows all work nicely. Has anyone got any tips? Any help is greatly appreciated.

It's not perfect but it works pretty well for me. Did you try the starter ini files, which are a separate download on the same page? Also, using the shadows shader, which is part of Oblivion Reloaded, helps quite a bit.