Friedrich Kirshner has been developing his machinima tool for the Unreal Tournament engine for a little over a year now. Called MovieSandbox, this FREE tool has some key distinctions worth noting:

• Open Source. Pop the hood, add to it or modify it! As far as I know, this is the only major mostly open source machinima creation tool out there at this time. (RE: mostly, wherever possible code is licensed under GPL.)
• True Machinima. Over the years, the definition of machinima has evolved quite a bit. But back in its humble beginnings, machinima was understood to be something which could be played back within a 3D game engine, and not just as a rendered video file. MovieSandbox is this kind of tool. Not only is the GUI running within a real-time 3D environment, but the movie itself renders fully in real-time 3D. This is different from iClone and Moviestorm, for example; while these tools do allow development within a real-time engine, their render process composes one frame at a time and turns it into digital video. (Incidentally, Friedrich is one of the only modern machinimators whose films can be seen - and in fact are intended to be seen - in real-time 3D playback, within the game engine.) Okay, so maybe this distribution method doesn’t soothe your inner geek quite the way it does for me… but look at it this way: Generally speaking, the more work that can be done within the more productive/responsive real-time environment, the less time needed later in the less productive world of post production. In fact, if you’re REALLY slick, you can conceivably eliminate post production as a separate step altogether. (Woo!)
• Non-traditional Character Types. Most machinima engines today have their own “standard” type of humanoid character which has a greater or lesser degree of modification available - yet in most of these engines, one can pretty easily identify the source engine of a film by identifying the standard shapes and/or animations of those characters. MovieSandbox allows for the creation of unique “hand-crafted” characters and animations. You can literally draw and paint the character right there on your screen. For an example of what I mean by non-standard, check out Friedrich’s person2184; not created with MSB per se, but he has said he is designing this tool for people who want to make films with a unique look like this.
• Video Tutorials. While MSB isn’t the only machinima tool to have these available, it’s certainly one of the very very few. And Friedrich is a great teacher. Check out this playlist of MovieSandbox tutorials on YouTube, which Friedrich is updating regularly right now.
• Bring In Real World Objects. An unprecedented add-on feature, the MilkScanner has to be seen to be believed. Don’t drink milk while watching the MilkScanner demo, unless you like it to come out your nose.

Everyone I’ve talked to who has seen this tool in action has been enthused by it. UT2004 is required to make use of it; that game can be obtained quite cheaply right now. And if you’re lucky, you can still snatch up one of the Editor’s Choice DVD editions, which comes chock full of mods and tutorials on UT’s own exceptional tools like Matinee and UnrealEd (both covered in Paul Marino’s book, if memory serves.)