I think Notch is confusing "scripted" with "staging".
Scripted would mean they follow a pre-set path and a pre-set amount of of options of how to behave. Every single time you played the game the same dragon would appear in the same place and behave exactly in the same manner.
Staging means the only scripting uses was ensure a dragon spawned as the appropriate place within the level. It would be mighty embarrassing to show a demo and a dragon not appear when you were trying to show off dragon gameplay.
Once the dragon has appeared they can do whatever their little AI package will let them. Fly here or there, perch at this place or that place, land and fight or fly through the sky divebombing, etc. THOSE actions are what Todd is referring to as not being scripted.
I think thsi si s more likely, the guy doesn't really understand what scripting is. Which is this, where they appear in the same spot every game.
I think since it was on an Xbox, and you can obviously see that it is edited, because of jumps to different areas, they probably picked and choosed the best dragon fights they got. Im thinking it might be true they are completely unscripted, for all we know it took them 20 hours of playing to get as cool a dragon fight as that one.
SO liley the dragons do use their cool little AI package and do whatever is determined to eb the best option, obviously if they are ina certain terrain it will designate certain actions as getting a higher chance of beign seleceted, just you wont always be having as awesome a dragon battle as that one.