Sorry bro, I wasn't into Morrowind all that much. Oblivion's tied for my fav. game though (for now, skyrim will most likely change that.)
Just a joke about the morrowind elitist fans :laugh:
I can think of a few ways convo's should be handled.
Passer by- Which is just a simple greeting if they're neutral or a even a minor threat if they don't like them.
Shooting the breeze- When npcs like each other and there not in a rush they should stop and say a few insignificant things like how's the wife or kids.
NPC 1 (has a wife): Hello there.
NPC 2: Hello friend, how's your wife?
NPC 1: She is good.
NPC 2: Good to hear.
NPC 1: I must be off.
NPC 2: Good bye
Hanging out- This should only work when they are sitting at a bar or any other lounging place, npcs sitting on benches with 50 feet apart from them shouldn't shout conversations obviously. These convos would be more in-depth as they can spread rumors. This should also effect npc's walking together.