In fact it depends on the situation. If I am attacking villagers or goblins, I would expect them to flee, as Lar said.
But if I try to burn a full party of long bow archers, I expect them to fight back !
I hope this can be done, I'd really want to blow things up haha :p
Anyway, Shea was worried about the epic side of being a dragon and killing everything if something is annoying us. I guess this can be solved by gameplay mechanics, like a mage that could force you to turn into human shape by using a spell, something like that.
This is entirely possible to balance the dragon. Look at Drakan. The dragon was powerful, but not overpowered. And there were plenty of dungeons and caves where he couldn't go.
But I think it's already too late
