Here is a sample of what the Creation Engine is capable of, courtesy of G4TV.com:
"If you're easily impressed by snow falling on rocks then you're going to be amazed with the updated artificial intelligence. The Radiant AI technology you saw used in Oblivion has been improved; villagers won't walk aimlessly unaware of your actions. Mills, farms, and mines have also been added to give the Characters something to do. People dwelling in the forest spend their time chopping wood, running logs through mills and then carrying their items around. That's NPC synergy, folks. Not only do the NPCs have new tasks they are also capable of developing feelings about you based of off your actions towards them. If you befriend a NPC and then enter his house at night he will offer you a place to stay for the night. But if you're mean to an NPC, maybe kill his horse, he will be hostile towards you."
This from Shacknews.com:
"Game Informer reports that the new engine, dubbed the "Creation Engine and Kit," seems custom built to deal with complaints from the studio's previous games. The redesigned engine is built around the needs of Bethesda's style of open world games. The team tweaked its lighting and shadows to render draw distance more realistically, created tools to make their own foliage found in the wild, and developed a program to accurately imitate snowfall accumulation."
"The AI is getting an overhaul as well. Skyrim promises characters with more defined personalities, who will each inhabit their environment more naturally. In a village, for example, citizens would chop wood, run a logging mill, and perform other day-to-day tasks. The AI is more aware of relationships, and friends won't mind the occasional pilfering like a stranger would."
Character animation will be set by Havok's Behavior technology, which allows Bethesda to create and blend animations with greater ease. This is being used both to create more realistic reactions from NPCs, and to balance the combat more effectively when the player is in third-person mode. It also allows the team to talk with NPCs while walking and exploring, instead of facing straight towards a character during conversation. Finally, the animation engine gives new life to the creatures in the game; however, Bethesda studio head Todd Howard played coy on the subject of mounts.
The new engine adds an element of randomness to the story proceedings. Story quests will still have their paths set by the designers, but the side quests will be tailored to your character. An assassination quest, for example, might shift based on who you've met and their relationships with the other NPCs. It recognizes your actions, so you'll see consequences and references from characters based on where you've been.”