Currently Online 
The story doesn't always have to be narrated to be great. The world can do a great job telling the story as well, see ICO and SoTC.
The longest journey and grim fandango are my favourites as well, Syberia also had great story telling.
Sometimes the overall story can be a bit thin but the characters make up for it. Dragon Age Origins had great character development and interaction. Mass Effect 2 was all about the characters and their backgrounds.
Heavy rain is one of the few recent games that actually bring story and character development together.
I agree that non lineairity and sandbox rpg's stand in the way of good character development. The world can still tell a good story but the characters are almost always just 1 dimensional and not effected by anything that happens around them.
