One thing I liked about Nehrim was that you occasionally ran into people that you simply couldn't initiate conversation with. I thought this would be a good addition to mods for Oblivion that add generic NPCs to cities and such, but I can't figure out how this is achieved. Does anybody know how they did it? Thanks for the help.

Im not sure thisll work on NPCs (it does with containers I think), but you could try a script attached to each 'non-interactable' NPC like this:

Begin OnActivateIf IsActionRef Player == 1        ReturnElse        ActivateEndIfEnd

The only reason I put a check to see if the player is doing it, is because I dont know if putting an overriding 'dont activate' script on an NPC (no matter what activates him/her) might screw other things up.

I haven't noticed any issues yet with just using OnActivate, so I don't think the check is necessary. Thanks for the tip!