I have been attacked by this ghostlike image called wil o the wisp and tried to attack it with a sword with no effect. Next was flares to try to kill it. still no effect. If anyone knows how to kill this thing, PLEASE enlighten me.

Silver, Daedric, or any enchanted weapon, doesn't matter if it's charged or not. Magic should also be effective. They are dangerous, and almost always cause attribute damage, so be careful around them.

Silver, daedric, or enchanted weapons.

Here is the info on wills: http://www.uesp.net/wiki/Oblivion:Creatures#Will-o-the-Wisp

As you can see, they are immune to your normal weapon. For melee, you need a silver, enchanted, daedric, bound weapon to affect them (same as ghosts; Honorblade of Chorrol works too).

Magic works fine though. I'm sure your flare was effective, just weak.

They can only hurt you at melee range - bows and ranged spells work wonderfully.

They can go invisible, so detect life helps track where they are.

Atronach birthsign characters with equipment to boost their spell absorption to 100% can just hug the glowing little critters and fill up their magicka.

My character just kills them at range with a bow - easy. :dance:

Yup, a sneak attack with a bow, almost as safe as nuking it from orbit

couple of days old this, but i have to mention, the safest and surest way to deal with a wisp is to use a persistant fire magic attack. That means a fire spell that contiues to do damage over time until the wisps health points are depleted, but, meanwhile you back off, preferably invisible, and just let the fire do its work.

wisps have the absorb healrh ability and if they attack you they will replenish themselves, so keeping clear is not only vital for your health, but also to starve the wisp of re-healing itself.

don't bother trying to escape over vwater - wisps travel easily on water, they leave a vee shaped wake as they go - so easy to spot as thet follow you.

of course, if you have a dominate creature spell, turning a wisp onto your side makes an excellent ally - you can enjoy watching two wisps turn on each other!

And if you're a Breton with the Mundane Ring (or anything else with 100% magic resistance), you can just stand there and kill them at your leisure or let them follow you around or whatever you want, since they don't have any physical attacks so they're completely harmless.