For anyone interested, i traced back the bug to hotfix 2009.09.22 It also caused a glitch in hardware shading, realtime shadows and AO display in the viewport.
damn, this is sweet. the clay material and organic forms are so spot on that it's hard to imagine anyone doing a better job at implementing this style in realtime 3D.
Thanks everybody! I used Max for modeling and Zbrush for the small suclpting tasks and Keshot for the renders. I should do the realtime version, right?