Is in shaders and lighting.
View the following images, they are of Oblivion and Morrowind in that order.
You can tell which one has "superior" graphics. But lets take these two scenes and disable the lighting effects by turning on full lights.
Judging from those images alone they could very well be from the same game! It seems that the biggest difference between the generations of games is lighting and shaders, huh.
I just thought it was interesting. It suprised me the first time I realized it at least.