NPCs should :

* Become totally invisible, TOTALLY not like a hot air person where you would still know where they are.
* Use potions to heal, should have a pre-determined number of restore magicka/health potions in their inventory.
* Use spells to heal.
* Use powerful spells like Frenzy on the player.

Guards should :

* Require to contact other guards or the hold's specific law 'office' in order for you to have a bounty on your head. When a guard sees you do a crime he should either :
(i) Attack You
(ii) Run to the Hold Authority office to report you so you have a bounty on your head and EVERY guard in that hold will attack you on sight.

But if you attack a guard and kill him, even if he sees you before you actually kill him, there shouldn't be a bounty on your head because that guard didn't contact the other guards of the hold therefore no one will look for you/suspect you.

If NPCs can become totally invisible, there should be some sort of indicator of the direction from which you were attacked when such an NPC attacks you.

hew would frenzy work on your character? YOURE in control ... killing a guard before he reports it and no one sees it Should get you off IMO.... also npcs should comment on the dead guard after discovery

Add:

The first person in the dungeon will run away from you immediately and alert everyone in the dungeon that they're being attacked.

very true. The lack of a sense of touch makes fighting invisible enemies an impossibility and the chameleon effect was way to easy to spot.
It makes for a very difficult combat situation. Still, invisibility itself was designed to instantly end the moment you attacked and chameleon creates that wavy appearance so it is actually balanced like that.
Basically, it is already done in a very effective way. There should be something along the lines of - to defense when being attacked by someone in chameleon but they should still be partially visible to keep the contrast from invisibility.

They could implement a system where the frenzy works on you character by making a 'macro' of the spell that simulates you pressing the attack button every second (you dont press it, the game assumes you're pressing it every second) and the macro makes you walk only in the directions of both enemies and allies, so you attack everybody, like frenzy does. They could also implement a 'fear' spell effect with this, by making the character run only in one direction and automatically.

I agree that would work pretty well. After all it doesn't exactly seem fair from a gameplay standpoint that we can use some spells but the npc's can't.

Yep. At least implement it for the hardest difficulty Bethesda. Instead of the hardest difficulty having enemies with higher health and dealing more damage, make enemies with special abilities, equal to the player's.

... you guys do remember that invisibility wears off when you attack someone right?

I recently started a topic discussing the need to remove the "haze" effect from so-called invisible enemies -- so I do agree with the main issue here. But seriously, what is the need to indicate the direction of the attack considering that the enemy is no longer invisible?