Since Oblivion arrived on GOG, I've been busy learning how to mod it & choosing the mods I wanted (there's way more than I thought, and one must pay attention for incompatibilities, so it takes time and lots of reading & planning), and trying to get the XBOX 360 controller working satisfactory, for I simply cannot play this kind of game with a mouse & keyboard. It turned out the controller was almost as difficult (and perhaps even more frustrating) than the modding, but the good news is I found a solution I'm completely happy with, so I'm sharing it here to help anyone else who wants to (or must) play with a controller.

First things first, to make it clear, I did not get the 360 controller working properly. After trying the best workarounds I could find, many of them claiming to be what I wanted, and attempting to tweak things myself, the best I could manage was almost good enough, except for the movement. I could walk forward, but only walk, and at a slow pace, while I could only run diagonally. It was also impossible to move straight forward for a decent distance; a slight bit off exact forward-center and the thumbstick thought I was trying to walk diagonally, so my character walked like a drunk, constantly swerving randomly to one side or the other. This would not only be an annoying struggle throughout the entire game, but it would shorten each game session because after a while it can make a person dizzy (or other disorienting effect). I managed to finally be able to run forward by mapping "run" to the left stick click, but it also only worked randomly, and made no difference with the swerving.

Then I remembered I have a possible alternative: a Logitech Cordless Rumblepad 2 controller. I bought it years ago and only used it once (the game I got it for quickly proved to be terrible, so I sold it and put the controller in storage), so It was in new condition, and happens to be almost the exact same shape and button layout as the 360 controller. In less than an hour from when I took the Rumblepad out of storage, I was playing Oblivion with a constoller so close to the 360 version (and without any annoyances) that I quickly got accustomed to it and finally began actually enjoying the game!!!

So, for all you fellow gamepad players, here's what I did (these instructions are for Windows 8.1 64-bit and this specific gamepad type; newer versions of both the operating system and controller may work the same or may not, I have no idea). FIrst you (obviously) need the Logitech Cordless Rumblepad 2, or one of the almost identical newer versions (as I said, if they work the same). I went to the Logitech site and downloaded the driver for it; during installation it asks you to connect/activate the controller so it can detect it. I left the Logitech Profiler popup minimized since I wasn't sure if I would need it, but I didn't, so you can probably just close it (it does however leave an icon on my bottom bar, and you must leave that or the controller won't work). Once that's done, go here (https://forums.nexusmods.com/index.php?/topic/195379-logitec-dual-action-controller/) for the instructions in post #2. I personally changed the last joystick setting to 0.3600, but as OP says, go ahead and adjust to your personal preference if you want (test in the game and go back to the ini to adjust).

Important note: if like me you play with inverted look up/down (flight-style; down means up), while in the ini change "bInvertYValues=0" so the 0 is instead a 1. This setting is just a couple above the ones you just tweaked. I found that this setting in the game menu didn't stay, so everytime I launched the game I had to invert it again, but changing it in the ini kept it from reverting. Make sure you save the ini after making changes to it. By the way, I use Notepad++ for changing game and mod ini files, as it makes it easier (for me).

Then like the OP says, start Oblivion & go to the joystick menu. You cannot map any control/command to the controller buttons, only what is shown in this list, but for me the only control/command missing was the game menu (to save or load game, exit the game, you know), so it's a very minor omission. All you need to do is click (with the mouse) on a control/command you want to assign to a specific button, then click the desired button on the controller.

If everything worked like it did for me, you should now be able to play GOG's DRM-free Oblivion the way you've been wanting to!
Note: if when you start a new game profile, or load a game save, the thumbsticks don't work, just click-in each of them to get them activated.

I hope this helps you!
Happy gaming everyone!

Cool. I prefer to play with a controller, too. I'm using and very happy with Xpadder.

Does your method allow you to navigate the menus console-style using the controller? That's the only real drawback of Xpadder: You have to use the controller sticks to drag the mouse cursor around the menus. It's not as bad as it might sound, and I got used to it pretty quickly. Plus, I keep my wireless mouse nearby for certain things (moving or selling large numbers of items, etc) - the mouse can be used anytime without disconnecting the controller.

Anyway, thanks for sharing - it's always good to have more options.

Been distracted playing the game, now that I finally succeeded in modding it properly, so kept forgotting to check back if anyone replied!

I still need to use the mouse (in my case, trackball) to navigate the menus, but I don't find it to be much of an annoyance. Actually didn't take long to adjust to the combination. It may be possible to use the Logitech Profiler program to configure the controller for full use with the game (menus and all), but it's good enough for me as it is right now, and I'm tired of tinkering with the game to get it running nearly flawlessly, so I won't be the one to try it! If anyone else does, be sure to post it here for others to know it's possible, works good and explain how it was accomplished!

How smooth is the movement with Xpadder? Can I use it for Morrowind? I tried Joy to Key, but because the left stick is emulating WASD, the movement comes out pretty jittery.

I use Xpadder for Bloodlines, Morrowind, Oblivion, pretty much any action game without XInput support. But I haven't played those games with K+M, so I can't provide a comparison.

Before Xpadder, I played Morrowind with a joystick mapped to the WASD keys (and others) in one hand and a mouse in the other hand... It wasn't bad! Like driving a mech. ;)