It's my understanding that after May 2012, UDK carries a bug that ceases the ability to cast shadows through masked materials? I'm not sure if that was every fixed but I'm using March 2012 to avoid the problem altogether.
My new problem is that when I import my normal maps, I always select "defer compression". When I save, the "defer compression" box unselects itself. And parallax doesn't seem to work without deferred compression enabled so I have to recheck the box after each save.
In all honesty, it's a minor hassle at worst and I'm glad I finally diagnosed the problem, but is there a stable iteration of UDK?
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2012-07 doesn't have the shadow with masked materials issue. I ran into it myself a while back and decided to update
And for the 'defer compression', that is simply just a way to speed up importing time by moving the compression back to whenever you save or build. It's going to compress automatically when you save(hence the unchecking). I'd take a look at your material again, there might be a problem in there.
Also, is the Masked material not casting Shadows in the Scene or only the Material Editor? Remember that the material editor tends to break from update to update, so you might want to check that it works in the scene, not to mention longs hours of use.
Also, Trans and Mask_Soft never cast shadows last I checked, so make sure you don't have any of those selected and instead have the default Masked only.
Lastly, there have been some reports that latest version of UDK and nVidia drivers aren't playing nice together, so you might want to look into that.