that's pretty awesome...I love these development threads...Is GuildWars 2 using its own proprietary game engine or is it one of the major engines like udk?
usually, yes.. could be that they are generated by hand for other engines though. some engines also allow direct access to mip maps as opposed to autogenerating them.
I always thought that it depends on the engine and platform if intersecting polys are a problem. Most modern engines for pc games don't have a problem with this I think.
The trick with the texture is diffuse light baking, done in for example 3ds max? Or is there some raytracing function in the engine (baking done within the engine, like UDK)?
almost all game engines olny use png or tga, for getting content into the game engine, once it is there it is usually converted to dds, and gets mipmaps generated for it.
What game engine is this? If it's a custom engine, talk to your graphics programmer. It's probably the tangents or bi-tangents getting messed up somewhere in the shading pipeline.