It is free, but that doesnt make it legal.
http://en.wikipedia.org/wiki/MUGEN#Legality
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The previous license agreements for usage of M.U.G.E.N from Elecbyte have expired and it appears that a new license agreement will never be granted. Thus, any current distribution of M.U.G.E.N has not been authorized by Elecbyte and is technically illegal. With the license expired on all versions, when running the M.U.G.E.N program, the user is reminded of this through a nag screen. While illegal, some view that the purpose of the executable's nag screen was to encourage adoption of newer iterations of the engine. Evidence of this can be inferred by the brief period of time that a license was made available from the release date of a version of the engine--it was often not long enough to develop an original character from start to finish. Although Elecbyte has never taken any legal action; the company has disappeared without explanation. People chose to continue using M.U.G.E.N, and deprecated versions of it, despite the lack of a new license (the DOS version was still in widespread use when its license had expired at a time when the Linux version's license was still valid). Creations, such as characters and stages, for use with M.U.G.E.N are not a part of Elecbyte's license (provided those creations do not include the executable as well), only the software itself is. It is up to the individual whether or not to violate Elecbyte's license by using M.U.G.E.N. Elecbyte itself has not made a public statement since 2003, when they stated that the project had "hit a snag".
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