This isn't mod related either since I had him unload all the mods he's using and started a fresh game on a fresh Oblivion.ini file. We listened to Valen Dreth taunt us from across the hall, then listened to the Blades and the Emperor discuss his dead sons. Then the Blades ordering the player to the window. Everything was working perfectly right up until the Emperor started the conversation with the player. At that point, only the subtitles were displayed.
Even stranger still, in all test cases the lip sync was working perfectly.
We then checked a few other games on the computer and they're all fine, including those with voice acted characters. It even plays the loose MP3 files for the dialogue just fine in media player.
And the last bit of strangeness? He played the game sometime last week and had no issues of any sort. Nothing on this PC has changed since I set up the game for him to use mods.
He's using Windows 7 Pro 64 bit, has 4GB of RAM, a large hard drive, a Radeon 4850 with 2GB and on board Realtek sound. The drivers are all up to date. DirectX has been updated as well, including the proper DX9 setup for the game.
I'm stumped. I've never seen anything have so specific an outcome like this. Usually you'll have all audio go at the same time, or it will be just the voiced audio, but never something where the voiced audio dies ONLY when the player walks up to talk to an NPC.
Any ideas?