General Comments:
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-- There is a  lot of interesting content in the essay, but it's poorly-organized, lacks a unifying theme, and most of the examples are either the author's own work or fairly obscure non-IF references.
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-- The chief weakness is that on the main topic -- NPC dialogue --  the author has apparently not decided what the main point of the essay is.  Is it the need to select an appropriate conversational system for the type of game you're writing?  Is it a how-to on how to write good dialogue?  Is it an exposition on why dialogue is essential to rich NPC development?  Is it a reference source for examples of good dialogue, and a parsing of what makes those example good?  The essay has a little bit of all of these, but doesn't really nail any of them.
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--  The author assumes that the reader has more specific knowledge of some of the references than they may necessarily have.  In the discussion of conversation systems, for example, he assumes that "Ask/Tell," menu systems, and "Talk to" as he references them are common to the reader's vocabulary.  But they may not be, and without more description of each system, there is small hope that a "newbie" author would understand the fundamental differences between the systems described. <i>[Ed. note: given the other content of the book, I wouldn't worry about this too much.]</i>
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--  There are numerous digressions to other media and or other game types which don't really heighten what the author is trying to say about NPC dialogue.  They are not uninteresting (I like Justice League of America comics, for example) but these references are not really relevant as to "how" or "why" to write good NPC dialogue if IF.
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-- Most references to modern IF works not written by the author are just that -- brief mentions, not fully analyzed examples.  The detailed references are either the author's own work or very dated examples from a Level 9 game and Infocom's Circuit's Edge.  Yet the modern IF works  he cites -- Galatea, Kaged, Pytho's Mask, and Varicella  -- would offer a rich vein of examples for "good dialogue" if they were explored more fully.  Not to mention other games like Being Andrew Plotkin, The Cabal, Photopia, and others where dialogue with/between NPCs plays an equally significant part of the delivery of the game itself.
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-- Overall, the author needs to (1) pick the major theme/point, as suggested in the first & second bullets (2) organize the essay better so that it flows naturally and ends with a reinforcement of the author's points and (3) make better use of IF references and less use of obscure authors and non-IF games as contrasts.  Right now, for example, the essay ends on a bullet point that could have been -- in a slightly rewritten fashion -- the starting point and organizing theme for the whole essay.  As it is, it's interesting but just leaves you thinking -- "Why didn't he concentrate on this?"
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Some other specific comments are interleaved in the text below.
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 Text adventures, unlike many other kinds of computer games, are really well positioned when it comes to creating rich and memorable non-player characters. Examples abound from both the old school ("Floyd," from "Planetfall," "Trent/Tiffany" from "Leather Goddesses of Phobos") and the new (The alien from "Fail-Safe," "Galatea" from the release of the same name).
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This starts off sounding like its going to be about NPCs in general, not good dialogue.  The point might be better stated as, "If you want to have great NPCs, you have to give them great dialogue.  That's the only way they come alive and step off the screen.  Otherwise, they are cardboard cutouts or scenery characters."
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However, one tactic that today's IF author can employ to both create deep and rich NPCs that both compare favorably to Infocom's and the average character in a commercial release is dialogue.
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By "commercial release," I assume he means non-IF games or the current versions of commercial "graphical adventures" that Andrew Plotkin often reviews on r.g.i.f.  I assume that, because he doesn't spell it out.
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The extreme disk size limits that Infocom and others faced twenty years ago no longer really apply to modern authors, and many more characters within professionally developed computer games are more concerned with selling you additional data crystals or getting out of the way of your rocket launcher than they are in holding any kind of meaningful or entertaining conversation with you.
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This is a bit of a non-sequitur.  If I were editing with a word limit, I would simply change it to say,  "Modern IF is one of the few media where you can have NPCs hold meaningful and entertaining conversations, so why not exploit that feature?"
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Several different types of conversation systems are available
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<SNIP>
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 (Further exploration of these and additional methods can be found in Chapter xx: NPC Conversation Systems.)
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If these systems are actually going to be covered in another essay in more detail, I would condense all of this down to nothing but the reference to that fact.  I don't think the type of conversation system actually limits how you write the dialogue, it only limits how the interpreter is going to display your choices to you.  If the other essay covers the systems in detail, then let it.
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After selecting a conversational style based on the kind of game you are writing, it will eventually come time to place some words in your characters' mouths. Dialogue is a facet of writing that intimidate some authors who are otherwise quite adept at illustrating their games within a text-based medium. It's common enough where the jobs of plotter and scripter are sometimes split in other mediums: for instance the first sixty issues of the old "Justice League America" comic book run had Keith Giffen plotting the books, and J. M. DeMatteis just handling the dialogue:
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Again, this is interesting but just doesn't belong in this essay.  Presumably, if you're writing an IF game, you've decided that you'll try to write some dialogue.  If not, I'm not sure you'd be reading this essay in the first place.
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Additionally, even Douglas Adams had expressed some self-doubt as to whether the women he wrote came off as genuine (Gaiman, xx).
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Assumes everybody knows Douglas Adams, which may or may not be true of the younger gen of IFers.
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While general tips in making your characters sound real include a lot of listening at real conversations and the devouring of books known for their characters' interactions
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These are good tips but passed over in an eye blink.   I thought the essay would have lots of these types of things in it.
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(I can certainly recommend the novels of George Alec Effinger, Gregory McDonald and Elmore Leonard, and the screenplays of Kevin Smith as good launching points)
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Why not reference IF works here?  Surely, IFers would be more interested in references to actual games than to novels.  But these 3 are also not even the tip of the iceberg if you're talking about novels.  I won't go on and on, but except for Elmore Leonard, the others are fairly obscure.  A better way to say it might be:  "Crime/detective novels are traditionally the home of brilliant dialogue.  I can personally recommend <insert his refs> and I've heard good things about <insert other refs>.  Other good sources are screenplays, which are almost all dialogue.  Kevin Smith, who wrote <insert some of KS's credits> is one of my favorites."
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there is really no substitute to spending time with your characters and getting to know them (and what they are likely to do) as people, as friends. If you've only got a few character traits to start with, I have found that it helps to "model" characters after people you know quite well while beginning your game.
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This is a great tip.  Unfortunately, the whole discussion of "Fallacy of Dawn" that comes after it is hard to follow and uncertain as to the point it is trying to make.  When he finally gets to actually quoting the conversation from the game, it is difficult to tell whether the whole paragraph is from the game, or is interleaved with the author's comments.  I would recommend quoting from the game in game style, e.g.,
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""He was a teaching assistant for one week in one of my classes,"
says Clara. "He wasn't around for very long, but he left an
impression. Then I saw him out here a few weeks ago."
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talk to Clara
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"What, did he quit?" I ask.
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"Mmm-hmm. They make us all take a few computer classes
in art history because a lot of us end up taking jobs where we are
archiving pictures and scans onto DVD. Using 'Toast' or some program
like that."
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 Though I confess to being a proponent of using the first-person narrative in text adventures on knee-jerk general principle alone, being able to do things like that through dialogue would be a precise reason why.
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Do things like what?  Presumably, he is talking about the character's inner dialogue.  But it is hard to be sure that's what he means.  He could expound on inner dialogue more,
but note that this dialogue is the PCs -- not the NPCs -- thought process.  While that can be a useful way to help delineate what the PC thinks about the NPC, it's not really the topic of NPC dialogue.  It's the topic "benefits of using 1st person as the narrative voice."
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Following are two scenes relating to the characters of George Alec Effinger, an author whose novel "When Gravity Fails" was the basis for the 1990 Infocom release "The Circuit's Edge." First, the character Marid Audran is depicted having his own back within "When Gravity Fails" during an attempt to get hustled:
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This long example fell pretty flat for me.  It's too involved, and though I know of Effinger I haven't read his books.  Nor did I ever play "The Circuit's Edge," being on hiatus from IF during that period.  The two scenes are not similar enough to see why one is so preferable over the other and, to some extent, the medium of IF always suffers from those kinds of direct comparisons to novels.  If the author had rephrased the game example and shown how a good IF rendition could have kept the punchiness of the original Effinger novel, then it might've worked for me.
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 Although we only have words at our command to really present our characters, as developers of interactive fiction, we do have two distinct advantages over more traditional gaming fare:
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 o Our players are already in a mindset to read.
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I'm not sure this is the right way to express this point.  One of the challenges of IF is what to do if you're audience IS NOT  in the mindset to read.   I think one answer is more dialogue, which is easier and more fun to read.  The non-IF references don't go down well with me, as I have virtually zero interest in RPGs and their many variants.
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 o Allowing the player to choose the exact response, the best quip or put-down with which to reply to NPCs is alien to not only novels and cinema, but most graphic adventures as well.
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Yes.  IF is about choice.  Having dialogue choices impact plot variables is a key benefit of IF.  But he doesn't detail how/why/where that is or could be done other than with a drive-by reference to some good IF games at the very end of the piece.   Much more on this topic would have made the  whole essay a lot stronger.