I'm not convinced that the method of presentation is necessarily an indication of the quality of interaction. Certainly in Morrowind the NPCs were lifeless and cardboard, but I think that was mainly down to the fact that there wasn't any decent dialogue rather than how it was presented.
Conversational style is preferable for decent NPC interaction, but I don't necessarily think it's required.
Well ideally, I like to see something that's fully conversational, where I can actually form a response that's more than just a keyword, but I agree that other methods can still evoke a decent character. The biggest problem with Morrowind, and the reason for it's constant comparison to a wiki system, was the fact that even NPC responses were hardly conversational, and completely genericised across the world.
A typical "question" from the player usually ellicited a completely overdone, encyclopaedic response. For instance:
PC: my trade
NPC: "I'm a commoner. I do whatever needs doing -- cooking, cleaning, building, baking, making, breaking. And I can tell from your accent that YOU are an outlander. Since you're new to these parts, perhaps you'd like me to share a little local lore."
PC: Fucking hell, woman. You need to add "not running your fucking mouth" to that list of chores. I didn't ask for your life story, and for the record, I've been here for nearly a year, and I've probably seen more of the province than you have, given that you haven't moved from this very spot, where I first met you.
(Of course, in game terms, that response is evoked through
Persuasion->Taunt and the devilish details are purely imaginary.)
NPC: "You would lose."
So, I proved the bitch wrong.
--
Anyway. It seems for Oblivion that the method used to "rectify" this oft cited shortcoming in Morrowind, was to voice all NPC speech. So, while this will no doubt make NPCs seem more like actual living beings rather than mostly stationary wiki machines, it also requires a huge amount of development resources, and even with 50 hours, it's going to be limiting. Personally, I don't think that's worth the gain compared with hiring a few writer/scripters to create conversational text.
But what do I know? I only learned that "reading" was messy the other day, so I've got a long way to go. All those wasted, literate years...