Quote: "uh, what happens if the camera overlaps the shadow volume?"
Light and dark in your 3D world are inverted! - Eg lit surfaces become black and vice versa.
Quote: "That command implies that shaders are involved. Do shadows work on any videocard that has support for the stencil buffer, or do they only work if you have a GF3 or higher ( ie : a card that supports pixel shaders. ) "
Shaders are not required - the command name is indeed very misleading. A 24-bit stencil is required though, most cards support this, but I found a Radeon 7000-series card which produced some really weird results due to only having an 8-bit stencil support.
Quote: "Can i set the shadows to be cast by other lights as well or is it exclusive to light zero?"
It is exclusive to light zero.
Quote: "I.E. can I declare a light object on each "lightsource" and have it effect the light of the objects around it (characters) and have them cast shadows or do i have to swap the light zero around to every lightsource in the area that is visible?"
The shadows are calculated for all objects with shadow shading enabled using light #0 as the casting light when you call the SYNC command. You cannot move the light around and have different objects' shadows cast at different angles. It does not matter if light 0's light actually reaches the object, you can have other lights influencing the object, but the position of light 0 is used in the generation of the shadow volume.
Quote: "Moreover, the shadows generated automatically by DBP look a bit crisp. Anyone thought of a way to get nice smooth ones?"
Stencil buffer shadows *can* be smoothed, but it isn't easy. Basically all the pixels of the screen which are in the shadow volume (the area in darkness created by an object) are made dark (one way of doing this is to turn all lights off, render the scene, turn them back on and then render all of the scene again except the pixels in shadow).
The easiest way I think of doing smoothed shadows would be lightmapping, with low-poly objects and a modern PC you can create low-res lightmaps (eg 128x128) for use as shadows in realtime. The edges of the shadows are a bit blocky but they are very smooth. Have a look in the code archives on the Blitz site, there is one there.