I've been using a 2 Damage Dagger with a 5 Fire Spell Damage Enchant that I picked up from a goon somewhere. I mostly use my One Handed Fine Steel Sword though, which does 5 or 6 damage, something like that. Boy those daggers are quick though, just too bad the enchant doesn't last very long before you have to go get it recharged, that's why I save it for the tough guys.
Go to Camp Ale. I can't remember where it is, its more northwestern than anything though I believe. I think its over by that first Fort place, where the first oblivion gate is. But anyways, thats where I got all my inheritance and other quests. You collect all the dwarven artifacts from bandits in that area, then you take it to the city to the mage district and it unlocks this area and this machine that can grant you different major powers depending on the moon cycle. Its a pretty simple quest with some pretty good items from the bandits, a bit of gold too if I remember, although not much. Its mainly about the enchanted items and the dwarven pieces.