So, I completed this quest a while ago: http://www.uesp.net/wiki/Oblivion:Through_A_Nightmare,_Darkly
I completed this a coupla years ago on Oblivion before my recent escapades in Morroblivion, everything worked fine.
Long story short, dream level, you lose all your equiptment while in the dream and then get them back unequiped when you leave, this was'nt an issue on the original but now the moment you get out Hernantier starts telling you to dress yourself and get decent (being naked and all), this would'nt be a problem if it was possible to stop him telling you.
You can stop the conversation but he starts it back up the next instant, making it completely impossible to go to your inventory and actually equip anything.
Only way I managed to get out of it was by opening the console while in the conversation, somehow selecting him (still not sure exactly how as it failed dozens of times) and then console 'kill'ing and after putting on some clothes resurrecting him.
All his words where in perfect Morroblivionesque (no sound, just lip movements) and as I recall NPC's telling you something very similar in Morrowind I'm fairly sure this is a problem caused by Morroblivion.

#1
I can verify that this is bug of Morroblivion and quite serious one. Hopefully someone will make a fix and quickly, becouse im quite sure that this bug messes up more quests then this one.