Well i played Oblivion couple of months ago without any problem, I have an ancient PC configuration though, 2.13 ghz celeron garbage, Fx 5500 256 mb card and 512 RAM. but now i wanted to play the addon too, my firend gave me GOY edition and installed the game. The thing is that when i played oblivion, it didn't run smoothly on this specs, but then 1.1 patch came out if i remember correctly and the launcher detected Very Low Quality settings for my card and everything was OK, but now it doesn't do the same... I read the info and i figured out that this edition includes all the patches, Including FX 5500 and older cards fix, but somehow it doesn't detect very low quality settings, it detects Low quality and I can't play with that, it's too laggy and thought someone could help with that...

You are just WAY overdue for an upgrade. The expansions have higher requirements than the OC part had.

The FX series cards have problems with some of the shaders that OB uses so Beth released the Ultra low setting specifically for them and added the preset settings to select in the launcher - but IIRC those presets were not included in the GOTY edition. http://www.4shared.com/file/0DM-Kr8s/OblivionLauncher.html that includes the presets use it to launch the game and select Ultra Low and it should help.