Originally Posted by Navaros
Nothing in your possession levels with you true, but most of the loot is scaled to your character. So at level 20 you will indeed get "good loot" but, relative to the word around you (which also scales) it will be no more effective than the early equipment was in the hands of your low-level character.
This does cause a problem with some unique items. You get them at level 5 and they'll stay at that level, becoming less powerful than mundane items you'll find at high levels. If this bugs you then you can get a mod that levels these items as you level. Check my mod list earlier in the thread.
To be honest Nav all of your criticisms can be overcome (or maybe just patched over) by mods. If you run Oblivion on a PC you are doing yourself a disservice by not using mods.
Oh, and the thing with the dagger? He won't pick it up because you have, in a minor way, broken the game by doing something you are not supposed to do.
Edit:
Whoever said Alchemy was a junk skill has never tried it - potions can enable you to win any fight.
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