a lot of games now use a system similar to the microsoft directmusic engine. this system is basically a series of musical themes (motifs), each potentially having different sub-themes and instruments. Over time, the system merges from one motif to another either randomly or via in-game triggers (such as being seen by a monster, entering a town, etc). Another style of in-game music is MOD files (more compatible). These can also be split up into motifs (a few games use this: from memory both unreal tournament and deus ex used mods) by utilising loop points.
I favour a dynamic music engine over an ogg player for in-game music as you can have it on for longer, and it gives you a better \"blend\" of music, rather than just a track for town, a track for fighting, a track for exploring, etc.