Dont give up all hope lol!
There was a feature on Gamespot that mentioned somthing about ATI and shadows on oblivion, but they were not a severe as yours. Really we need work out what is causing the problem, so lets wait until someone in the team with more know-how than me about graphics comes and helps you out.
By the way, have you downloaded the latest patch for the game? If not you can find it and various others
Here.
Good Luck mate!