I am in love with this so far! Really great. Can't wait for more.
As for the UDK issues, I can't help very much, if at all, other than to say in the mesh's settings, there are options in regards to lightmaps, which may be set too low to get crisp and accurate shadows. So, maybe bump that up from what it is (I think default is 32?), to some higher power of two, to taste. Of course, when working, you probably just want it to bake fast, and they aren't looking so bad in this shot.
Keep up the good work, dude.