In Morrowind the graphics may have not been that great, but the faces still looked good. They have good detail for them. But Oblivion on the other hand which has better graphics. The faces...well they look like the got puked out. (I'm not trying to sound like a dike, but this is really the best way for me to describe them.)
It is strange to me that you feel that way.
I started with Oblivion, and then tried Morrowind (and really liked it).
But I thought one of the most disgusting parts of Morrowind was the faces. They looked insanely bad. One of the first mods I got for Morrowind was a face replacer. Those faces were so hideous in Morrowind I question how people could play the game without mods.
I think the Oblivion faces can be very beautiful.
The only real problem is that the heads are too large in proportion to the bodies (in Oblivion). That gives them a slightly cartoonish look. But other than that they can look pretty good. And note that every NPC or PC is supposed to be beautiful, just as in real life. But there are some good looking NPCs. And lots of pictures of amazingly beautiful PCs have been posted in picture threads.
So I don't really agree with the OP.
Those are not the faces problem. It's the meshes and color problems. And still how can you say that http://images.wikia.com/oblivion/images/0/0a/TypicalDunmer.jpg looks worse than http://image.com.com/gamespot/images/2002/pc/featurepreviews/morrowind/morrowind_screen005.jpg. The graphics can't even compare.
Excellent example. And that Morrowind NPC is, I think, one of the better looking ones.