doubtful daggerfall will be released free. the source code will never be released, isn't there signifigant parts that are licensed or something?
No, it was in-house technology. It's with Morrowind that they started using licensed stuff. (Well, with Redguard actually, it included GLide stuff for those who had 3DFX cards.) The XnGine was developed by Bethesda and used in Terminator: Future Shock, Daggerfall, Battlespire, and Redguard. I think the first prototype for Morrowind was built with it as well, but they adopted NetImmerse (it wasn't yet called Gamebryo at the time) when they started building the real game.
It's sad the source code is lost. All software companies should all do like Id Software does and open-source their old engines, letting people make modern ports for their old games and preventing loss of code. Unfortunately, dixit Pete, "that's just not what we do."