I haven't encountered any shading/shadow issues with using the LOD landscape textures so far. Nor any slowdowns.
I've managed to get pretty good fps on my Opteron 146 @ 2.8ghz, 6800gt at Ultra speeds. Currently, Oblivion is set to 1280x1024, hdr on, 4xAF, objects, view distance, items maxed, grass distance maxed, specular on half, shadows on half both int and ext, no tree canopy shadows.
Tweaking the ini files and using the LOD textures, I get 18-30 fps outside even in high foliage areas with plenty going on, 40-60 fps indoors.
The LOD textures are excellent for making things look better without having to alter uGridDistantCount=5. Likewise, iMinGrassSize=160 gives a massive boost to fps without affecting the visuals too much and used in conjunction with iMaxGrassTypesPerTexure=4 ensures things still look good. bForceFullLOD=1 makes things look very sharp with AF. There are loads of decent tips out there to tweak Oblivion with to get good performance on last gen hardware, it just takes a little effort to install the decent mods and tweak the .ini file a bit.