I'm trying to get the diffuse lighting shader from the introduction to shader programming by Taco Cohen to work as I want, but can't quite seem to get it.

Problem is that the dynamic light seems to light the whole scene, but I would like it to be blocked by the models. In the demo level provided it seems to work fine with the sun, but I would like to use lights for this. How is this done?

This is what I mean (ball acts as a dynamic light, but the whole box is lighted. I'd like the back to be shadowed as the real shadows fall):
http://koti.mbnet.fi/ttb/gamestu.jpg

Does the light act as a sun and light still come from above, even if the light object is placed on to the ground level in WED? Or what's going on?