OBSE is a powerful modders tool. However it can be quite complicated.
What it does: OBSE gives many powerful script commands to the CS, and allows Oblivion to understand the command and act appropriately. Keep in mind that OBSE is optional, many mods do not use it in fact, but I highly recommend it, even if you aren't planning on being a scripter, the ability for Oblivion to understand the powerful new commands that can be found in many powerful mods.
First, install OBSE
http://obse.silverlock.org/
The download includes a readme with installation instructions, but I will give a brief overview.
Open the readme, and extract all the files it lists to the Oblivion directory. Make sure you do not extract them to the Data directory. One of the files it tells you to extract is the obse_loader. This starts up Oblivion normally, except now it can use scripts that are used in many of the best MODS.
Now we need to create a shortcut to the OBSE loader. This can be done by right-clicking the icon and selecting 'create shortcut'. An identical file should appear. Right click the new file and select properties. In the General Tab, you can change the name of the shortcut to whatever you want. For instance, Oblivion, or OBSE Oblivion. Now click on the 'shortcut' tab. On the very bottom should be a link that says 'Change Icon.' Click this, and navigate your way to the Oblivion directory. Once there, find and select 'Oblivion Launcher' then choose the Icon you wish to use.
Next, move the shortcut to your desktop, and move the standard Oblivion one back to your Oblivion directory, or you could simply delete it.
Congratulations! You have successfully installed OBSE! Simply double-click the shortcut to play!
Now to install the OBSE Construction Set. Right-Click the CS shortcut, and then choose the shortcut tab. Delete everything after the word 'Oblivion/' and then type in the following.
obse_loader.exe -editor
Be sure to include the quotation mark. Now you're finished.
If you don't already have Oblivion Mod Manager, walk on over to Tesnexus and download it. With OBMM you can change your load order, and use mods that are compressed in an OMOD format.
{Edited By DarkRider} For Easy Launching of OBSE use the OBSE Launcher