Personally I don't find it impressive at all that they made an interesting backstory for these characters, since they are central to the main quest and no matter what you HAVE to talk to them to complete it. I think the point is, or should be, that not enough smaller everyday characters who were in city streets had any interesting stories. Random NPC's having interesting backrounds or situations is what makes the game interesting and fun imo. And Oblivion was sadly lacking in this.

Off the top of my head there was the Redguard girl training in the Arena who was supposedly the daughter of the Arena guy or whatever, but you don't get any elaboration on that. There's Glarthir, but after I did his quest I felt like there was nothing else to do really in Skingrad except talk to the Dunmer shop-keeper girl and hope she'd say something more about necromancy, since she was one of the only NPC's with anything unique to say. Besides from the little quests that each city had, like save my farm from goblins I'm too old, there wasn't anyone who was just interesting for the sake of being a unique person in the world.

I don't think it's too much to ask for them to differentiate even slightly on the everyday dialogue. I think thoughtful writing is completely necessary for these games, I would play Fable if I wanted standardized quests and standardized people.

This. All the way.

There are also several NPCs in Oblivion that you can find books written by them. Herminia Cinna, the woman who plays an important role in the Umbacano questline, and whom informs you about the Last King of the Ayleids, also has a book titled "The Last King of the Ayleids" which is not at all essential for the quest, just happens to be there. You can also talk to Alessia Ottus, author of the "Guide to _____" series, and she's just walking around the Imperial City. I also talked to a Nord male in the IC who mentioned a feud with some other family, I didn't know what he was talking about but there was apparently something going on there.

So there's more backstory than people realize sometimes. You can't expect every character to have a backstory, it's a bit unrealistic to be able to learn everyone's story like that, but there are a few bits and pieces, just enough to convince me that it's a real, living, breathing world around me.

There's always room for improvement and all of that could be done to a further extent.

I personally have never found more than a couple of characters interesting, in DAO it was Leliana, in Mass Effect it was Ashley, in Fable 2 it was Lucien and Garth, in Oblivion it was Mankar Camoran, in Fallout new vegas it was House and Caesar.

I don't know why it is I just don't really find many characters that interesting.

Fair enough. I think because of the similarity in voice actors and some of the races kind of made me not got out of my way to talk to people, because I would talk to a few who all looked/sounded/ and said the exact same thing and then I gradually stopped expecting to find someone interesting. But now I feel like going back and scouring some more. It seems like everything was there in Oblivion for it to be as successful in that sense as some people felt Morrowind was (quirky memorable characters) it must just be some issue with the way it was implemented that I can't quite put my finger on. Maybe it's just me not adjusting well to Oblivions different style. I don't know, but If Bethesda utilizes the best of both worlds for Skyrim then it will be one kick ass game. I wouldn't be devastated by the OB status-quo NPC's either though, I'm optimistic they figured out a somewhat happy medium for everybody.

The characters I found interesting in Dragon Age were Sten, Allistair, Leliana, Morrigan, Oghren, Shale, and Wynne.
In Oblivion I liked, well Baurus. Hmm... I'm seeing a problem here.