Benefits of Scripted Conversations
Although scripted conversation forces the player to say only the lines available in the script, it produces a sequence of plausible remarks and replies. It also gives you a way to illustrate both the avatar's and the NPC's personality through something other than their appearance. You can write their lines in such a way that you give them distinct personalities of their own. For instance, Guybrush Threepwood, the hero of the Monkey Island games, uses phrases that reveal him as a wise guy who seldom takes anything seriously. The character's vocabulary, grammar, dialect, and— if the game features recorded audio—tone of voice and accent provide important cues.
The scripted conversation is not merely a mechanism for giving the player information, however. It's a real part of the story, and the player's choices can have a distinct effect on the progress of the game. If an NPC asks the player to entrust him with a valuable secret, then the player's decision, whether to tell or not to tell, could have far-reaching consequences. The player has to choose responses based on her assessment of the NPC's character—to which you, the designer, must provide clues.
For a more detailed discussion of different ways of designing scripted conversations, read Chapter 14, "Dialogue Engines," of the book Game Writing: Narrative Skills for Videogames, edited by Chris Bateman (Bateman, 2006). Bateman points out that large dialog trees can be unwieldy to work with, and he proposes some simpler alternatives. He is undoubtedly correct, but for complex conversations about a variety of subjects, the dialog tree offers you the most comprehensive scripting power.