So I just activated the moathouse respawn, and I decided to go in the back way. I walked into the main room, formerly Lareth's guards. There is a witch in there alright, with some friends. She doesn't attack, nor does she initiate dialog. Is she supposed to be friendly? Does it have anything to do with the fact that I always roll with my massive undead army? And why are all my soldiers suddenly paralyzed?
Well the witch is supposed to attack you on sight, as well as her undead minions. It may be that you have not gotten into her line of sight, that your undead army may be offsetting her KOS command, and/or some other glitch I do not know. Try to exit and then go back and see if she will attack.
Yes, I mentioned the undead army because I had a funny feeling they were cancelling the trigger somehow. As long as there isn't supposed to be any dialog, I'll just initiate combat. It's not LOS though, because I walked right up and talked to her. She just gives some generic balloon text though. Maybe she recognizes a fellow necromancer and just wants to be friendly.
The witch and her gang are set to KOS; the presence of other undead doesn't affect that. Not sure what's wrong in your game ... when you say you activated the Moathouse Respawn, do you simply mean that it came about naturally, or did you do something to engineer the conditions? Also, what do you mean about your soldiers being paralyzed?
Just the usual Smythe->Kent once the story state was appropriate. Nothing weird. Upon entering the moathouse, I noticed all my Shadows had the condition of "paralyzed" showing on their tooltip when I mouse over them. They can still move though, doesn't seem to affect them in any way. Strange.