Fuck man, I have been wanting to play dagger fall for ages, but, getting it set up with DOSbox is a fucking insane chore && getting a computer that is old enough to run it is, also, an insane chore.
As far as the combat system goes, what I dislike about the morrowind combat system is the fact that it is so clunky; The enemies run around sporadically and there is no real sense of direction when attacking or even a feeling of actually being engaged in combat. When I hit some one in skyrim, I know that I hit them. I can see it and feel it in my bones. It's obvious. When I hit them in morrowind (if I actually manage to land a successful hit [cliff racers are impossible to actually hit some times]) it doesn't give me a sensation of actually having made contact. I just feels like I am punching wildly into the air. What you are describing I think is the leveling system and, yes, I agree that it is far more rewarding in morrowind when playing from the aspect of a barbarian or anything really. You really do have to work to get what you desire, but, as far as the actual mechanics of combat go, holy shit they are clunky a fuck and that just ticks me off.
Oblivion made small improvements and obviously skyrim has the best improvements on actual combat mechanics, imo. But, yeah, I think every one is pretty much n agreement morrowind is still the best of the three so far.
I usually just crank up the difficulty on oblivion slightly and on my skyrim play through I am one rung under legendary, lol.