So I'm running around with a skill level of 7 in dodge and theres things with a 99% chance to hit me. What gives? seems like a pointless waste of talent points if its lying to me.

Dodge does not affect the To Hit value. It's makes a separate calculation regardless of your opponent's chance to hit you. An example: a wolf has 90% To Hit you; you fight; the wolf rolls and gets a hit; however it doesn't mean it will hit you beacause now your Dodge skill does it's share and you still have 7% chance to avoid the wolf's attack. I'm using Dodge a lot and I must admit it is not very effective at lower levels. But boost it to 15-16 points, add two Wind Rings and you'll see how dramatically it changes the flow of any fight. It's especially useful against the toughest opponents that would normally hit you 10 out of 10 times. Plus it gives you a To Hit boost for one round whenever you successfully dodge an attack. It's one of my favourite fighter skills in the game.

I agree that this is not the easiest to understand. I've requested that in Book III the Dodge and Armor skills both contribute to your defense the same way wearing armor and having high Dexterity do in Books I and II. Among other benefits, that would mean that to hit percents would be displayed in a way that makes more sense.

Whre did you request that? I need to counter it...It's perfectly fine the way it is. A little brain activity while playing games isn't such a bad idea

It's not the original poster's problem that bothers me, it's that Dodge is severely underpowered at low levels and game-breaking at high levels. The Armor skills are both incredibly good at level 1 but then not strong enough to be worth putting points into. Really, "skill balance" is my main request for Book III.

You're right here. It should be capped at around 25%. In my playthrough I'm keeping it at 16 plus to Wind Rings and wasn't planning to improve it by more than 5 points because I feared that would ruin balance. But combining it with armor seems like over-simplification...
...though I can definitely think of some interesting ways to do it.

Although I have had characters with a wind ring, I have never seen a dodge.