whether or not combat was an improvement, let alone major, is based on opinion. the only difference is that when you attack you hit every time. you might miss alot in morrowind, (if you were stupid and picked spears as your main wp skill and tried to fight enemies with a dagger, but if you used the weapons that you had the skill for you would miss not that often)
There were improvements beyond the dice-roll vs scaled-damage changes. Combat was more fluid due to NPCs actually moving around, guards and other friendly NPCs would actually help (or try to) if you're being attacked, you could get special abilities (dodges, disarm attacks, paralyze attacks) by leveling up your skills...
Spell casting hasn't changed, except for maybe the effectiveness factor depending on armor, but thats hardly counts as an improvement.
You no longer have to switch between "melee" and "casting" stances. Spells didn't risk failing at crucial moments.
archer? what about it, it has changed, other than only getting to use bows.
The arrows work on physics, which allows for much better aiming. Arrows will also properly react to the environment (bounce off stone, stick in grass or wood) and can be retrieved. Zoom perk.
AI and NPC schedule are the same, all that changed was that AI moved more smoothly, it still uses most of the same methods for conversation and how they wandered. (the improvements to NPC's was merely what they improved with graphics)
I think you need to pay more attenition to Oblivion's NPCs. Each and every one has a 24 hour schedule. They have some place to sleep, some place to eat, and some place to wonder durring daylight hours. They open and close their shops, will talk amongst themselves (which is also a way to learn about new topics and quests), and know when it's appropriate to offer services (eg, you won't be able to buy spells from a mage that's sitting down to eat dinner). Some NPCs will even physically travel between cities as part of their normal routine.
Inter npc interactions? have no clue what your talking about.
They can talk amongst themselves and know who their friends are. They're more snappy at people they don't like, while more chatty with people they do like. And if you attack someone, your friends will help you, while their friends will attack you and your friends.