OH LOL. this is how it works. jesus i totaly forgot. this drove me up a wall the first time. when you have 2 objects and you want to merge them, xsi creates a 3rd object that is the merged one. it leaves the 2 objects as they are in case you want to go back. haha with it's history saving feature and this whole thing, it's…
Maybe preventing specific objects from casting shadows onto themselves could be a fix in a way that doesn't create any other noticeable issues. And the AO map would then compensate for the areas that will be getting less shadows as a result. Disabling Mesh > Cast Shadows does this, but that option also prevents the mesh…
Simple! Select that object, right-click it, then select "Object Properties". There's the "Backface Cull" option on the left, just check it and your'e done!
Fantastic, huge improvement on those rocks! The silhouette for objects is very important - as it is the first thing that the brain uses to identify said object.