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Summarya small step forward, a large step backward
The GoodThe graphics engine is finally good. It actually runs faster than Morrowind while managing to cram in tons more detail and kilometers of viewing distance.
The landscape looks much more realistic than in Morrowind.
Radiant AI is an improvement from NPCs just standing there.
The BadMy biggest complaint is that the enemies scale with you. This means that at the beginning you'll be fighting bandits with leather armor and weapons and then towards the end you'll fight bandits with glass armor and weapons and higher levels. And it's not just that there's a higher probability of meeting tougher bandits. At each level there's only one set of bandits that you'll meet. You'll never meet bandits with cool equipment at lower levels. And this goes for all enemies. This makes leveling kind of pointless since any enemy you meet will be adjusted to your level. But that's actually a bit broken. See, if you invest in combat skills it'll be easy, but if you invest in magery, or heck, the more social skills, it'll be really hard and even impossible. This is a really dumb and game-breaking feature, and I don't understand what they were thinking at all. There are mods out there that address this but none fix it completely.
Equipment scales as well... that's right, the artifact's power depends on which level you are when you find it.
The graphics engine is good, but the graphics themselves are kind of boring. The Imperial City is truly something to behold, but only when viewed from afar. Inside the city everything looks bland, thick, cartoony, unreal. It just feels... wrong. Morrowind had beautiful, varied architecture, from the familiar Imperial to the breathtaking Telvanni organic strongholds. In Oblivion it's all Imperial. The greatest variety is stone vs. wood buildings. Humans look absolutely awful. Not awful as in low-poly. Rather, they look like they all have Down's syndrome. Seriously.
The physics engine doesn't add anything to the game at all. I don't see why they included it.
The interface is terrible. Big ugly fonts, lots of ugly icons, and worst of all, an omnipresent GPS that shows nearby points of interest and with an arrow to your next objective. You can mod the GPS out, but it's pointless since none of the quest-givers tell you where to go, as they just assume you'll follow the friendly arrow.
Mana now regenerates on the fly, not just when sleeping. This makes mages much less tactical and spells into just another sort of mundane weapon. The levitation spell is gone.
There are only two types of dungeons: Goblin caves and ghost caves. And they all look exactly the same.
Whereas Morrowind felt more like a coherent world where things happen if you are there or not (even though they didn't really), Oblivion felt like I was playing an arcade game, where every single object and feature was there for some carefully thought-out (but sometimes badly implemented) gameplay element.
There's tons more to say of course, but I'll stop here.