Yes, yes, and yes.
The combat system is my #1 as well, and not just the system itself, but also the tactical combat engine. Fundamental changes need to be made to make tactical combat fun, rather than an excercise in making sure the auto-resolve doesn't kill your weak guys that are tagging along for XP.
First, I find the "tactical" combat almost devoid of tactics. Magic users cast, archers fire, melee guys move up and swing. Positioning and unit formation mean nothing. Combined arms and army composition mean very little. Morale has little to no effect.
My suggestion: the tactical combat engine, at a minimum, should include the concepts of engagement and flanking. Units in melee with each other are engaged - breaking that engagement gives the opponent a free shot. For flanking, if a unit is engaged, and attacked by a second unit (not the one it is engaged with) it suffers extra damage, or is easier to hit. Archers engaged with a melee unit cannot shoot anyone else. Similar to these concepts is the idea of support - that a unit with a friendly unit next to it is more effective. Adding these things in a relatively simple way would make the tactical combat much, much more enjoyable.
Of course, one of the reasons combat is so simple is probably so that the AI can handle it. This will require a major AI upgrade, and I'd encourage Stardock to think about changing the Auto-Resolve in the process. I suggest that Auto-Resolve ought to be based on something other than the AI playing both sides really fast in the tactical combat engine. I'd recommend something based on a combat rating ratio (assuming they modify the way Combat Ratings are calculated so it really does reflect the combat power of the stack), with some random chance of attrition. Make it roughly equivalent, but not the same. The reason is that I don't want to take the time to play out every battle, but if I can see that the AI is doing stupid stuff with my troops, that's going to be frustrating. I don't want to have to choose between being bored or frustrated. If you can make an AI that does everything exactly the way I would have, great! - except that now there's no reason for me to do tactical combat at all. So I just don't see a good solution if the AI is just playing out tactical combat for me.
I'm not impressed by the random-terrain-gives-bonuses-and-penalties "feature", which requires you to mouseover the whole battlefield in order to find the important squares (if there are any) on the battlefield. Add in that the terrain modifier isn't really that significant, and it's a layer of the game that could be interesting, but isn't. I like the idea that terrain influences the battle, but I'd rather see just a few squares in each battlefield that give a significant bonus. These squares should be easy to identify, maybe by a graphic, or maybe a toggled overlay. It would be even better if the location of the squares was dictated by the terrain in global map. So if I attack someone on a hill on the big map, they get a few "high ground" squares on their side of the battlefield map.
I think the Morale system has promise, but it needs to be made a lot more significant in the game. Morale should definitely affect the effectiveness of groups, and should have more levels than just "rout if it's low enough" - losing movement points and/or moving randomly are both possibilities. This, of course, becomes a lot more significant if positioning actually matters.
Lastly, from an eye candy perspective, I'd really encourage Stardock to look at the scale of the figures on the battlefield. It really looks terrible when a single figure is defending one corner of his square, and then has to run to another corner to defend against a second attacker. Figures should be large enough that they don't need to move within the square, but can attack and defend from the center of it. Of course, the consequence here is that larger squads and monsters (i.e., dragons) will have to be larger than a single square. I recognize this is a lot of extra work on the core code, but I think it would be worth it in the long run.
If the tactical combat engine is interesting, then the units can be fairly simple, and you still have interesting combat. Even so, I think a single Attack and Defense rating is too simple (and, as the OP said, the 1-N model is just terrible). I'd really like to see the "to hit" and damage rolls separated. I think the minimum here is to have Attack and Defense used to calculate probability to hit, and then have a separate "Damage" stat, which could be modified by the Att/Def ratio. I think I'd prefer to add an Armor stat as well, that mitigates damage. Then Att/Def are used to calculate whether the strike hit, and Damage/Armor are used to calculate damage to the unit. I think 4 stats would really start to give the units some differentiation and personality. Implicit in all of this is that HPs are balanced better with the combat model, so that trade-offs in the stats mean something - if the combat model strongly favors any single strategy (glass cannons currently), then it isn't much fun. The model should implicitly lead to a system of expensive generalists and cheaper specialists who are strong in specific situations, but weak in others.
Aside from the combat system, I'd probably put a meaningful magic system as a close second priority for me. Special unit abilities become less important if the tactical combat itself is interesting. I'd still like to see special abilities, but they're not the centerpiece of combat - the combat itself should be the centerpiece of combat. The OP mentioned balance as well, and that's pretty much a no-brainer. But, really, I think Stardock hasn't even finished the engine yet (or at least, I hope they haven't), so let's get that done first because it's hard to balance the units when the combat system itself is in flux. Meaningful damage types I could do without, actually. I think the whole slashing/bashing/piercing thing is probably more complexity than the system really needs, and doesn't necessarily offer that much. Yes, I would like to be able to build a counter unit to a specific enemy unit that's hurting me, but I think a good combat system would offer that without multiple damage types. Magic resistances, OTOH, would be very nice to see. That would help differentiate the magic types in the game, which would be a good thing, but the magic system needs a lot more help than just that to be really interesting.