True about the "static meshes". UT2k4 uses CSG to make the basic 'level geometry', and they finish that with filling the spots with static meshes and terrain. And it indeed looked very nice! But if you try to make oranic shapes, you should make a mesh and add that to the world, don't model it with CSG. However the unreal editor handles CSG pretty nice! Sometimes it still bugs a but, but with a little edit-vertex tweaking you could fix most things!

EDIT:

@Will: Here are some ppl writing "a better 2D engine". Why not start a project "a better 3D engine" (with editor). I'm sure you guys could manage it! However I'm not going to help with coding, but could point you guys in the right direction. And the pascal-community would have a 3D engine with editor to make fancy looking games.

Anyhow to get on-topic: you could also model the walls in stead of make a heightmap out of it . It would be faster and in most cases beter looking.