ok story wise im mostly wanting to hold out on starting that but the concept is that a demon or perhaps alien was captured byu the US government and held in solidarity for many years. It however breaks lose and soon there after people start sleeping for longer and longer periods of time. This demon/alien has the ability to shift from existing in the waking world to the Dream Scape; a world forged soley in the dreams of men. The alien needs a host to enter the Dream Scape but once he finds one he is free to roam, unless the Dreamer of the dream space he is currently in awakens. In this game you play an average kid that gets trapped in this monsters nightmares, but being that it is only a dream you have the ability to become anyone or make anything in your effort to escape. Along the way you must deal with the demons put forth by various dreamers also sharing the Dream Scape. players start by escaping a nightmare, only to awake to an even worse reality. Then they must ventrue back into their dreams to hunt down the cause of the endless chaos. how i am working this now is a tactical combat setup similar to Final Fantasy Tactics with a slightly more real time slant, and mixing in the Xenogears combo system. The game is currently going to be produced as a 2d game using allegro. The players themselves will form the Dream Scape as the client - server setup will be like Diablo II's LAN setup with the added potential for server - server/client connections so an entire Dream Space created by one player can connect to another players Dream Space, forming vast worlds that the players themselves can eventually create in the entirety. my question is how can i go about making thsi kind of game fun?

That's not an MMORPG, it's just a multiplayer tactics game, so the whole concept is different.
I would suggest focusing on a small number of players, maybe teams or something like that.

non combat scenarios will involve quests to unravel the minds of other dreamers, and character development will be a restricted take on the job system, allowing custimization but attempting to balance PvP situations. Players can co operate in teams of 3 in quests or 4 on 4 PvP. perhaps it wont be completely what people would consider a mmorpg but it will be a mix of FFT combat, questing , puzzle solving and horrorific demons that people had assumed they exiled from themselves.

so now that we have the setup of genre any other ideas?

What the MMORPG genre needs isn't yet another concoction of clichés. It needs immersive worlds. The creators shall build worlds that let its inhabitants govern themselves however they may choose.

The builders must not impose anything on their inhabitants. They are merely the suppliers of material. In particular, they should not impose a history. The history shall begin with the creation of the world, and it shall end with its eventual destruction. The players shall create their own history. They should not impose an economy. They should give their inhabitants the material and expressivity they need to create their own economy. Same with politics.

Think of yourselves as Gods. Can you imagine God creating this world because he saw some stuff in a movie and thought it was cool? Don't throw together yet another copy of a copy of a copy. The job of an MMORPG designer is noble. Don't fucking waste it.

I'm sure I read your storyline in a book once (pretty much exactly as you put it forth).

This could potentially provide a good environment for your in-game world, but as others have said above, it doesnt really sound like an ideal setting for a MMORPG, and your gameplay concept doesnt seem much like one either.

Will all the worlds be dream-spaces, or will there be 'real world' ones as well? If there arent real-world ones (or at least one), how will the players know the effects thier alterations to the dream-scape are having on the real world? That does, afterall, seem to be a rather integral part of your storyline. and therefore must be somehow included, be it through cutscenes, a 'real-world' server, or whatever.

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but being that it is only a dream you have the ability to become anyone or make anything in your effort to escape.

That sounds quite tricky to implement, how do you plan to allow the player to become or create anything they desire? Possibly you could have a large list instead of just 'anything they like,' and could track some sort of stat or skill on how much control the player has over the dream-scape, and give them access to cooler stuff the more control they have. Or of course, going with your system of many linked servers, players could create thier own additional content for the game - this would require something akin to the 'hakpak' system of Neverwinter Nights, where players must download the appropriate content before entering a server.

On a related issue, if you do manage to come up with a successful implementation, you'll have to deal with the issue of providing challenge to a player who can become or create (can they also destroy???) anything they wish.

My solution to making a new style of MMO? Real, player driving politics. To the point of there being a massive power structure where players can take control of organizations and buildings and suchlike until ultimately a single, human player is "ruler of the universe". Play it as a team-oriented game where ultimately every player is out for himself, and he can switch factions and suchlike at will. Give cash prizes for being "king". Televise the high-council shennanigans on a weekly reality show on G4.