yes, the xpcap only gives you more health. the characters are well-balanced at their highest level...if thaco kept going down, you gained access to more high level spells, and your saves went down until you were level 40, your character would be undefeatable. Though i'm sure someone could mod the character level up to the specifications that he wanted, if they wanted to have thaco lower every 5 levels after the max, i'm sure it's possible.
secondly...the "improved" you are referring to comes from an installed mod, it makes everyone tougher, and (i think) increases the A.I. on some of the bosses. (dont trust me on that one).
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