@Asaaf Raman: I have used Mental Mill briefly and UE3 briefly, I’ll have a closer look at some of the other tools when I get a chance, and write up some sort of comparison.
@Praetor: Good idea, I didn’t consider that CG was practically the same as HLSL, shouldn’t be a problem.
@Tuan Kuranes: My idea was basically to expose all the functionality of a material script via a hierarchy of materials, techniques and passes, each with their attributes modifiable in a panel when selected (basically an automated way of using a GUI to create material scripts), and the shader builder would automatically write shader program definitions and include shader parameters as needed.
I see your point that while this might be a lot easier than writing material scripts, it's not really the ultimate solution for people with no knowledge of materials or shaders.
The problem is that the editor makes no assumptions about the application, so all this functionality that the aforementioned user won't know what to do with, is forced on them (like lights per pass, passes for different light types, etc).
Unreal Engine 3 for example doesn't have this problem, because the shader editor only takes certain parameters (diffuse, normal, spec, emissive, etc) as output, and handles everything else internally, not giving you complete control as the material system in Ogre does.
One possible solution would be to keep the current design, but add the ability for programmers to set up their own templates to give to their artists to use, so the artists will only have to use the node based editor. They would open the template and have something like the PreviewMatieral_1 box in this screenshot of UE3:

Then all the artist would have to do, is set up their textures, link their own nodes up to the normal, diffuse, and whatever else the programmer set up, and be done.
e.g. The artist would be presented with this to do with as they please:

The programmer could choose to create a template in the editor and define a list of parameters and their types.
Then they would go about creating a material in the editor to their liking, set it up as they need for their application, and create the shaders using named template nodes in the place of the actual normal, diffuse, etc parameters.
e.g.:

While these images don’t appear to change much from the previous image I posted, hopefully it shows the idea of using templates and what you could potentially do with them.
This adds quite a bit to an already ambitious project, so perhaps if people think this is a good idea, I could just create the node based shader editor for GSoC with support for templates via .material scripts and using the node based editor to set up each pass.
Let me know if anything doesn't make sense.
I already submitted my application, but the idea is still very open to discussion, I put a link to this thread in the ‘Link to Further Information’ box, so I’d love to discuss this with any of the mentors, or any Ogre users with an opinion. I’m on the Ogre IRC when I’m not sleeping, and you can get my IM/email info from my profile, otherwise we can continue the discussion slowly in this thread. (:
Cheers,
-Matt