I opened your file in 2.57. All the textures are not showing up.
But your collision problems: Firstly it seems like you do not have any collision bounds set in the physics tab. You should probably set your terrain and any objects that you need to walk over to ‘Triangle mesh’. Simpler shapes should be set to a shape that matches them closer, eg a chest would probably be set on ‘Box’.
As for your character problem, it seems like your using the armature as the main object for interacting with the terrain. As I’ve seen alot on these forums, you should instead, set both the armature and the character mesh to ‘No collision’ and Make a simpler, invisible box/mesh to be your characters collsion bounds and parent the armature to it. Then put your movement logic on it, and using the shift key, select both the box and the armature, so you can link the logic to the armatures actions. This will work a alot better than trying to get an armarture to collide with the terrain, because the armature isn’t a ‘Mesh’.
I’ve modified the file and attached it. You may just want to open it up along side and copy what i’ve done yours.
def_zone_large_1_MODIFIED.blend (1.76 MB)