Beauty is only skin deep.

I can has prttee karctor??
No, no you cannot have a pretty Oblivion character. At least not without a whole lot of work and a whole lot of saving. PC users have the ability to make it easier on themselves with mods and quick saves. Console users, to be quite frank; we're up shit creek without a paddle.

Lighting:
It's bad. You will not have good lighting at any point during the two sections where you can create a character's face. While the prison area has slightly better ambient lighting you still have a problem with the sides of the characters face being cast in weird shadows from the torch light or in darker shadows on the other side. This creates some pretty bad blotchy looking skin tones and if you try to correct them they will look horrible in other lighting.
At the end of the sewer you will find a lighting source that is extremely harsh in the front and very dark on the sides. I still personally prefer this section for making characters for two simple reasons. 1) You can save. Saving is very important when trying to construct a character face in Oblivion, there is no resetting of single sliders in Oblivion(All or nothing). Since moving one slider affects a slider on a totally different part of the face you can often times end up ruining those perfect eyes while you're trying to correct that horrible mouth. 2) You can access the armor menu. The menu will give you a more natural lighting effect (though it is still a bit harsher simply because of the light you're facing.)

Getting Started:
Oh the horror that is the generic Oblivon faces. It seems in the world of Nirn people do not age well at all, most of the generic faces you get from randomizing will look like horribly aged mummies. While some people can start from scratch with the default race/gender face and make a good one, I personally can't. But, like what the Mythbusters proved; you can polish a turd. So find a decent face and work off it.

Shaping the face:
Everything you do will undo something else. The sliders all have an affect on one another, so move them with care and watch what you're doing. Don't think you can just go to the mouth section and work on the mouth. You move the mouth around and the effect on the chin, cheeks and jaw can be horrific. Pay attention and move slowly, look at what each slider does to the different sections of the face and move them accordingly to get the result you want.

Skin tones:
Skin tones are probably the most difficult. While creating a face is a test in patience to begin with you will need patience on the level of water carving a canyon to create the perfect skin tone. It can however be done, I've made Dunmer have perfectly tan exotic colored skin and Redguard look white (wait.. that actually kinda sounded racist..) Point being, it's not impossible to get characters with dark skin to look lighter or characters with light skin to look darker or even to make a character look an unnatural color. It takes a lot of time and patience to do it, but it can be done. Inching the sliders back and forth to get that perfect skin tone you want. It's also not impossible to get a decent looking beard this way either.
That's another thing, don't be afraid to use the beard and mustach shaders on female characters, it can help to even out patchy looking skin.

Hair:
Hairdo makes the man. Find a hair that frames the characters face just right and you will have a better looking character. This is often times difficult because hair in Oblivon is boring and dull so sometimes you will just have to settle. Try to also avoid extreme hair colors as well, black rarely looks good on a character and will often times highlight the blotchy sections around the eyes and noes. White has almost the same effect and will highlight blotchy skin.

----More to come----