Well, I tried exiting Cyseal and re-entering and yes I was able to interact with NPC's, but only my Male character's. The female character's were mute! I tried several city exits/enters, still bugged.
So... reload previous Black Cove early save, entered/cleared Ominous Cove, spoke with Desdemona and after she pops away the exclamation mark showed up again. Bug is definately repeatable so please take note. I guess I can't progress further in the story since I have limited/no dialogue options.
