This is called banding, and has been explained here in details (with how to "fix" it) : http://polycount.com/discussion/148303/of-bit-depths-banding-and-normal-maps/p1
At a glance it looks like a banding problem, bake at 16bit and drop it down to 8bit with dithering in photoshop http://polycount.com/discussion/148303/of-bit-depths-banding-and-normal-maps/p1
Good stuff man, looking forward to more as I'm planning on moving back to Blender for modeling once Bmesh is out (currently I only really use it for uv mappping). Thought this was worth pointing out to those who haven't seen it. It's like polyboost for Blender I think. A script called LoopTools…
Take this as you please dude - with a Dwarf being a fantasy creature it's really up to the artist to take it in the best direction they see fit. I think you should play about with the basic forms a bit more. I feel that he should have a bigger gut, broader shoulders, and his legs and bottom should be lengthened slightly.…
Looks like banding to me. Bake your normal map at 16bits (I assume SP will do so automatically) and make sure it's being exported as 16bits (png or tiff or .psd should do the trick). http://polycount.com/discussion/148303/of-bit-depths-banding-and-normal-maps/p1