And to the person who commented earlier that size changing reticules work fine in fps (and they do i wont argue with that) may I remind you that TES is not an fps and arrows are not bullets, which are unaffected by gravity in almost every fps, and even when they are effected it is not nearly to the same extent as an arrow.
Well, they sort of are, but I won't go into semantics as to how gravity affects arrows. The gravity drop doesn't pose a problem at any rate, dispersion circles will still work just fine. Yes, I realise that I have said that the arrows will strike "within the circle", but that is merely a simplification. The dispersion circle represents deviation from the aiming point, which may be above the target. Remember that this is only an illustration; it only says that at your current skill level, the arrows will have a max deviation from your aiming point of, say, 60 mils. Obviously, the arrows will still drop below the reticule once released, and therefore below the centre of the circle, but the deviation from the aiming point still stays the same.
The "dispersion circle" as presented to the player stays the same; the "hit circle" around the target (a completely abstract creation only for the purpose of this post) will represent the actual impact, and it will be the exact same size as the dispersion circle. It's the actual dispersion (60 mils in the example above) that's important. The circle merely means that when you release the string, the arrow will have an exit direction somewhere within the circle, as opposed to dead centre.
Edit: Everything gets better with an example.
Your character has a marksman skill of 30. At this skill level, the circle is at 50 mils, meaning maximum deviation is at 25 mils in all directions.
You aim at a target some distance away. In order to compensate for arrow drop, you aim 10 mils above the target.
As you release the arrow, random numbers are drawn between 0 and 50 for deviation in X and Y planes. Those numbers are -15 X (horizontal) and +25 Y (vertical), so the arrow will deviate somewhat to the left and upwards. It starts out with an angle of 35 mils above the centre, because 10 mils superelevation + 25 mils deviation = 35 mils.
Assuming 10 mils superelevation was a correct estimation, the arrow will drop 10 mils as it travels towards the target, and strike 15 mils to the left of the centre of the target, and 25 mils above the centre of the target. Keep in mind that mils are angular, the amount of metres will change as range increases (One mil equals 1 metre at 1000 metres, and 0,5 metres at 500) - if the target was at 100 metres, this means you'll hit 1,5 metres to the left and 2,5 metres above the centre of the target, probably a miss. If the target was at 25 metres, the arrow will strike app. 0,3 metres to the left and app 0,6 metres above the centre - which could be a hit. (Obviously assuming that you estimated superelevation correctly)
These calculations might seem complex, but this is obviously not something the player will be troubled with. He will just be presented with an "estimated accuracy" based on max dispersion. (If we go for the visible circles solution)
This sounds a whole lot more complicated than it is
In order to discuss gravity drop, maybe it's better think of the circle as an invisible funnel that surrounds the curved trajectory towards the target, expanding as range increases(at the mil/metre-ratio as above). The walls of the funnel symbolizes the deviation; that is - the arrows freedom to move. It will hit within the funnel. As I said, the dispersion circle is a simplification, but it does present all the information the player needs.