AI is the ugly little sister of gaming, people prefer not to talk about it and every now and again someone smears some makeup on it and calls it improved.
That said, Oblivion does stand out in the horrendous AI section. I think you're being way too forgiving with 98%, unless you're counting all the times NPCs wander around and stare at walls as "a success". You'll note in Gothic they actually had activities, sat around and sung at appropriate times, forged weapons, cooked food - Oblivion falls way short there.
The NPC-to-NPC interaction is botched almost every time it is tested by the player, and sometimes even botched when you don't interject. From
guards talking about the Dark Brotherhood (not to mention the guard's odd praising of your blade skill before arresting you) to
people attacking their own dogs because they like you so much. Heck, I myself saw the hilarity of a guard slaughtering sailors because I walked onto their ship - I broke the law and the guard attacks them. This was what - a few hours into playing Oblivion for the first time, and already the AI majorly messes up.
Moester said:
I mean show me another game where NPCs actually moved and interacted with one another in dynamic ways.
Are you serious? Gothic had people move around and interact in dynamics ways - they only cut out a lot of the audible conversation because they realised (and Bethesda didn't) that otherwise you'd get stupid, repetitive conversations ("I saw a mudcrab the other day").
People will know more examples, but another one that comes to mind is GTA: San Andreas, a year older than Oblivion.
Moester said:
Out of all the previews I've read, I've yet to read anything negative about the AI or even the physics engine...Which sounds to me like they've tightened them up.
Heh. None of the reviews for Oblivion talk much about the broken AI. Every player encountered it, it was openly mocked on forums and Youtube, yet journalists acted like their nose bled and just ignored it.
And you honestly take previews not mentioning it as proof that it's improved? I hope you're joking.
Also on the topic of Radiant AI: to hear pretty much anyone who had a serious look at how it works (modders) talk about it, it's actually one of the simplest AI systems around. That turns the excuse of "Bethesda had too much ambition and that's why a complex AI system broke down" into "Oblivion has a stupid AI system and that proves Bethesda just can't do AI".