Before I start, let me preface this with the statement that I'm not expert on copyright law, or any kind of law, but I've read enough legal documents to delude myself into thinking I can understand bits of it here and there.
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That would seem to be the case ... thats unfortunate, but what can you do? Hopefully the growing interest in the area may persuade Beth decide to release the source at sometime legally or something .... otherwise, eh.
As far as I know, due to the deal with Emergent Game Technology, Bethesda will never release the source for Morrowind. Seeing as the NetImmerse engine was not designed by them, I'm not even sure whether or not they own the source (all depends on the intercorporate licensing terms, I suppose). So don't get your hopes up for that, at least intil NetImmerse is released by Emergent as open-source (and, given the continuing success of GameBryo, chances are that'll never happen).
QUOTE(TESgamerKyle @ Aug 8 2008, 07:47 PM)

... This sux, if Beth wont allow it. i was SO excited about this, even tho i have pretty much no clue what it does. all i knew was it would make the AI better, and it will be possible to do more things in MW. i would DL it even if it was just AI better. but now i dont think i will Ever be able to DL it D:
I don't think, without taking out patents on the ESP file format, Bethesda can stop this effort. So long as the new OpenMorrowind engine functions only as a read and render engine for the existing data, and in some way verifies that the user has a legal copy of that data (even if it's only by not distributing it with the engine), it should be as legal as MWEdit, MGE, Enchanted Editor, MWSE, MWE, Littoral, MGen, or any of the other projects which read that same data. Seeing as Bethesda can't do anything about keeping people from using the NIF or DDS formats (seeing as they were not even created by BethSoft), even if the ESM/ESP data was somehow declared off-limits, this engine could still be make capable of loading the other data files. The only potential problem is the BIK videos, as Bink is a proprietary codec, owned by Rad Game Tools (or someone like that).
As for enchanced features, that's not extremely likely, especially in certain areas. Given the ES* format, it would be impossible to encode physics data (eg mass) in objects, meaning seperate physics definition files would be necessary. Ragdolls could be possible, but again, how to define animations in the NIF format on-the-fly, while still supporting KF-based animation files? And what would define the joint limits? How would the bones be converted from the NIF standard skeleton? Advanced AI could be possible, but then comes the problem of merging in the existing AI packages. The easiest thing would be added lighting quality, shader support, and better alpha-channeling.
Anyways, just ill-informed speculation.
And now all this talk of new engines makes me want to write one. Must avoid that urge.