In game I get NO shadowing at all, the beginning cell is just gray and white. looks very discusting and unenjoyable of the graphics hehe.

my specs are:
XFX Radeon 5770 1gb
Gigabyte p55-ud6
intel i5 processor
corsair ddr3 ram

Ive ran the game in vista/xp compatibilities, change all shadow settings to all possible outcomes and get nothing except a less brighter environment.

Is there anyting I can do to fix this?

The problem is that the 5770 is recognized by the games autodetect as an old Nvidia FX5700 series card and selects the shader package based on that card and those had shader implementation problems (which is why the first patch introduced the Ultra Low Setting !) -- to fix launch the game using the launcher and select the Ultra high preset setting (this will reenable the shaders so they work properly ) - then once in game you can adjust the settings as needed -- The shaders do not have an in game slider so enabling them needs to be done with the presets (or in the .ini but I'm not sure how to change the shader package that the game selects so I always just use that method each time I update the video drivers and the game then auto detects again !!

I posted the solution just yesterday for you sef24 over on Steam. It's the exact same thing JDFan said above, which is the correct solution. Run the Oblivion Launcher.exe.