This is 100% incorrect. As Lady Nerevar said, ORIGINALLY TES III was going to be called Tribunal, and actually set in Summerset Isle. This was the way it was up until 1998-9 or so, when the setting was changed to Morrowind, but the name kept; it wasn't until late 1999/2000 or so when the game's name was changed and finalized to Morrowind.
Similarly, the first time the public knew the name of Oblivion was in September 2004.
I might be reaching here, my friend, since so many years have passed... But take a look at this text released by Bethesda for the 10th anniversary of TES (http://tamrielchronicles.com/html/the_elder_scrolls.html).
It is correct that Morrowind was originally going to be called Tribunal and set in Sumurset Isle, just as Daggerfall was originally supposed to be called Mournhold and set in Morrowind... However, extrapolating from the text you can see that the setting and title for TES 3 was changed to Morrowind less than a year after the completion of Daggerfall...
I remember vivid discussions about this on the message boards of TES: The Essential Site (don't know if there are any other old geezers remembering this site, used to be the one-stop-shop for Daggerfall fanatics back in the day. A not-fully-functional relic can be found at The Imperial Library - http://www.imperial-library.info/~crodo/main.html). However the boards do not seem to be working anymore and I am sure that topics from the nineties must have been wiped years ago anyway...
Someone who knew a developer at Bethesda (or indeed an anon dev himself) was posting info about what ideas were in store for future games in the series, such as what features would be in, but not, however, where the games would be set. I remember it being stated that in TES 4 (not 3) the player would be able to actually visit Oblivion, and in conjunction with this a working title (note: not a finalized name) of "Oblivion" was suggested.
Again, I might be reaching terribly here, but I suppose nothing short of a dev statement would lend clarification to the matter. I do however remember that in 2004 I was not surprised at all about the announcement of Oblivion. So, if I have my facts wrong, I must have dreamt the title up
Not out to cause flame wars here, just reminiscing about old times