First of all, if you are more familiar with the term "radiant questing," then I'd just like to mention that it is the exact same thing.
My article on Radiant AI explained how it gave creatures and NPC's rules and needs.

Radiant Story will take a bunch of variable into account and create results from that. As far as I've gathered, there are the Main Quest, alternative quests and "side missions."
The Main quest is almost hand crafted all the way through, with few examples of Radiant Story, alternative quests have a bit more radiant story, and the side missions consists almost entirely of radiant story.
What radiant story does to quests is that it says: Ok, so you've been avoiding this area, so maybe we'll send you over here --->
Let us take an example: A side mission where a woman, a friend of yours, her daughter has been kidnapped and she requests that you retrieve her. Then the radiant quest system notices that you haven't been in Area A, so it sends you to a cave there. Once you arrive, the kidnapper turns out to be a person who hates, one of the people you are on an unfriendly basis with, maybe because you killed his father. The RS (Radiant Story) chose him because of your poor relationship with him. He kidnapped her because he knew that he could get you alone when you came to rescue her, and then he could exact his revenge.
All the variables here, the quest-giver, the quest place, the kidnapper, are all chosen by radiant story in order to give you an awesome, new experience.
Another example straight from Todd: Say your task is to go to a dungeon and retrieve an item, RS sees that you haven't fought high-level undead in a while, so it sends you to a dungeon that has high-level undead.
Also reward items can be affected by radiant story. It can pull in all sorts of variables, for almost everything. If you've been avoiding dragons, it'll make you go fight a dragon.
It also teamworks with Radiant AI to enact random encounters. Say you throw a valuable sword on the ground, two guys might pass by and start fighting over the item, maybe even try to kill each other, should no one be around, another guy might pick it up and ask if you don't want it anymore or a merchant might have the audacity to try and sell it back to you. Of course you kill the merchant for his insolence, which may later result in his two sons finding you in order to avenge their murdered father. That is of course only if they know that you did it, which kind of requires witnesses. Mwahaha.
I hope that this give you a better understanding of radiant story, if not, comment and ask for more.
Cheerio!
