Take a look at the following images... I'm pretty sure both are supposed to look like that.
Image 1
Image 2
Printable View
The problem is that the polygon casting the shadow and the polygon the shadow is being cast onto are too close to eachother. There's 3 ways to fix this: a higher depth resolution(unlikely in DX9), shadow maps for each character or PSSM. I have high hopes that it will be fixed in 2.0.