3dmodels : in short it's a legal problem. the 3d models and the other data from mondains legacy are still the property of EA, and we are not affiliated with them in any way, so we are not allowed to redistribute these files, even if they stopped developing their 3d client.
for the same reason "upgrading" the existing models is not possible, they belong to EA and they don't allow derivative works.
And the models are rather old, and use only a fraction of whats possible with ogre, e.g. shaders, normal maps, specular maps etc, and they are rather lowpoly as well, so i think it's best to create new models from scratch.
how to use/test custom models :
http://www.iris2.de/index.php/CharacterModelOverride
It's currently not possible (or at least rather difficult) to replace Human Models and clothes etc, since they consist of many independant parts that all have to be animated for all human animations.
graphical limits : performance is a big problem, as in almost any complex realtime 3d app *g*
I think people often think that uo should run blazingly fast with full hardware acceleration on a modern engine, but
UO wasn't designed for the kind of hardware acceleration we have today, so it cannot take full advantage of it.
For example : gfx-cards don't handle many small objects very well compared
to a few very detailed ones like in typical 3d games, and uo has many many small objects.
We apply several tricks to cope with it, including texture atlases and complex batching, but it still is a problem.
But Iris is far from fully optimized yet, and some fancy eyecandy is possible without damping performance too much, so there is still lots of interesting stuff to try out, especially with an engine like ogre in there =)