I just picked up the Bioshock / Oblivion IV bundle from GameStop for $30! I'm done ripping Oblivion to my hdd....
I've S-Ranked Fallout 3 so I should be vaguely familar with the engine.
But I've never played Oblivion thus I don't know anything about the Oblivion world, what race should I start out as and why?

Depends on what aspect of combat you want to focus on. Dunmer would be a good choice as they're pretty well rounded.

My last character was a female Argonian battlemage-type, so you're not really restricted with whatever race you choose. There's a very good wiki that might help if you want to really get deep into it.

For your first playthrough, beginners should probably stick with Dark Elves. Their all-around badassery suits inexperience well.

It's really dependent on what your play style is...I always play as a Mage-heavy character so I use Breton personally. Also, you'll have an opportunity to change your race/birthsign/etc before officially starting the game...in case you don't feel comfortable with your original choice. I'd recommend just trying out the race(s) that seem interesting to you and if you feel comfortable with their abilities during the tutorial then stick with that race...if not, you'll be able to change your race to something else.

I was an Orc Warrior Warrior.  I smashed things with hammers.  I got the skeleton key because as an Orc Warrior Warrior I couldn't pick a lock to save my life.  You should find the skeleton key.  All I remember about that is that it's a reward for one of the Daedric quests but I don't remember which one.

Unless you are a hardcore powergamer I would not fret too much over your race. While different races do favor certain character types, these are mearly perks and their benefits become marginalized as your character levels. My first character was an Orc Battlemage and I had absolutly no problems frying countess guards. There is no prize in Oblivion for creating the most badass character, so I say pick whatever race you like the best and don't worry about how well it synergies with your classes abilities.

" @Kush: "So I use Breton..." So what you're saying is, you play the game in the correct way? Well done good sir. "

Pick what you want to play as for the entire course of the game, it really doesn't matter much on what you pick, you can train your character into all type of combat if you wanted.

I played as a Khajit (SP?) because i wanted to be a stealth character and they are a very agile race.
I also improved upon my character by contracting vampirism and making sure to feed to keep the negative side effects to a minimum.

" For your first playthrough, beginners should probably stick with Dark Elves. Their all-around badassery suits inexperience well. "