so how did the combat system with melee weapons work in daggerfall any way?
Is it like Morrowind where you miss alot until you level up the skill
or is it like oblivion where your damage increases as you level up the skill

I think its your characters agility that determines whether you hit or miss and your strength affects how much damage you do to them. Also your skill in the weapon and the direction you swing it can affect how much damage you do. But I could be wrong.

To read a bit more about DF combat http://www.uesp.net/wiki/Daggerfall:Combat

It's similar to Morrowind but more like Arena. Agility higher than sixty gives a bonus to hit and every ten points after improves the bonus, up to the max of 100. Skill only improves your chance of dealing damage, and weapon material is also important(an iron weapon will land less successful hits than an ebony weapon). Also certain advantages and disadvantages you pick while making a custom class can make using some weapons easier or fighting some enemy types harder. In Daggerfall only hand to hand damage improves with skill.