I think Curio has it spot on - a compromise between Morrowind's system and Oblivion's system is needed. In Morrowind, when you reached the higher levels, you practically became a God, and nothing would stand a chance in hell against you. By contrast, in Oblivion, the challenge presented by any mob is essentially a constant based on your current difficulty setting (obviously affected slightly by level scaling offsets and your own skill distributions and equipment).
What we need is a partially scaled mob system, so some places will be inherently easy, or inherently hard, and are barely affected by your level at all, while others (e.g. outside/the wilderness) will scale according to your level.
I just really don't like the feeling of knowing that nothing is beyond my currenty capabilities. If I wanted, I could go and complete the game without increasing any skills at all (although you technically couldn't do that.) I used to like venturing into a cave to investigate it, only to get owned by some high end mob, learning my lesson and steering clear until later. In Oblivion you don't get this. It just gives the sense that everything is designed to cater for your every need right from the start, rather than just getting dumped a big harsh world and left to fend for yourself.
Another unrelated minor gripe that I have with Obilivion is that it just doesn't feel as epic as Morrowind. I think this is mainly a result of having almost everthing centred around just 9 main settlements, with very little going on in between them. In Morrowind, there are hundreds of small, disparate settlements scattered all over the place (which are all mapped, though not necessarily named, on the map that comes with the game), and none of the action is actually centred anywhere; there are no real "main" towns in the game, other than Vivec, Ebonheart, Balmora, and possibly a few others. I played Morrowind for years and I still haven't visited all of the towns/villages around Vvardenfell. There are also far fewer factions in Oblivion, which is a bit of a dissapointment really.
If we could take the best of Oblivion and Morrowind and stick them together, I think we would have an absolutely incredible game.