Its usually quantity vs quality when it comes to this.

I would rather prefer many short conversations, that are more unique and actually worth listening to(not like Oblivion). Rather then some long conversations you would hear tons of times.

There should be some long ones too though. They could perhaps add a few npcs in each town that would have long conversations together, about various topics (which would be affected by major events in quests etc.). So you would actually be tempted to find 2 of these in a inn and listen to their conversation.

In general i would like npcs to feel more dynamic/alive. Most of them always felt very static in Oblivion.

Yes Thief was fantastic, but to be fair none of it was randomized, it was all scripted to be played out exactly when you enter a certain place.

My game has glitched where there were two gaurds and a regular citizen, some DarkElf guy with lipstick, I forget his name, anyway the Elf said the usual, "I saw a mudcrab the other day, nasty creatures" and the guard said "Good, I'm hungry"

I was meaning the guard captains and guards.
Like this one I just dicovered in the CS, and have never heard before 'Spotted a minotaur out by the ridge. He nearly had my poor Bessie here for lunch! Fear not, the monster's now rotting in a ditch, I assure you.'
And the response 'So goes the life of a rider, hmm? Come what may, at least we're not rotting on the streets of some gods-forsaken city like Bravil, or Leyawiin! '

To be quite honest, I loved the smalltalk, especially the most ridiculous lines. For example when you overheard two Dark Brotherhood assassins, who had probably just been out all night slaughtering innocent people, talk and one said to the other "I saw a mudcrab the other day". Always made me laugh.

Interestingly enough, the guy who designed that level is the same fella that did the Dark Brotherhood quests: Emil Pagliarulo!

Why has everyone in the IC seen a mudcrab the other day? Was it some kind of petting zoo?!

Mudcrab overpopulation maybe?

If Morrowind had been released at the time of Oblivion, I guess we would've heard 'I saw a cliff racer the other day' constantly.