My friend once told me that theres a thing for Oblivion where you can use your Mic to talk to NPCs. Is this true or was he pulling my strings?

The latter.

He's pulling your strings harder than a puppeteer pimp pulling a puppet prosttute (In other words, yes, he's lying).

thanks, but i reallly wish he wasnt lying. Wouldnt that be awesome??!!?

You can just talk in real life, and let them respond however they like. Makes it funnier. Check out the "Funny Replies You Make To NPC's" thread for inspiration.

You could talk along with your character.

RUMORS

JOIN THE FIGHTERS GUILD

That's a good idea actually.

Before clicking "Rumors" say "So, what are the most recent rumors you've heard?" in real life. It would make it seem a lot more realistic.

And then the people who live in the same household as you start looking at you really weirdly...

Well I didn't say go in the living room and announce it to your second-grand-uncle.. Just mumble it, to immerse yourself better. I do it from time to time. My TV is in my room though, so it doesn't matter.

Hell, they'll think Im either talking over Xbox Live or Skyping.

(Or on the phone)

I'd feel really weird doing that.

Problem is, my room (where I've got my computer) is really near to the living room, where most of my family spends all their time. So you can hear what I'm saying in my room. I think everyone'd get kinda freaked out if I was all "Heard any news from the other provinces?", "I know what you mean, I hate mudcrabs too!" or "No, YOU move like a pregnant cow, you bastard!" to myself in here...

EDIT // Plus, it'd feel weird, like Going Viral said.

Im pretty sure they'd think you've lost it and stop you from playing anymore.