Lamp, WIP
 

I say WIP but I'm not really sure, I think I'm happy with it, but I'm sure I'll spend some time tweaking away at it.

I have 2 questions if anyone can help?

1) What setting do i need to modify so that the really small pen shadows are smoother,

2) What setting, if any, changes the sharpness as the spotlight hits the floor?

Large versions - Lamp 1 and Lamp 2

For the shadows turn on raytrace shadows in the light attributes. Also dont forget to turn it on in the render globals!

And for the sharpness; set a decay rate on the light.

you could change the penumbra of the light, that will make the edges of the light softer or harder (depending on the setting). it's in the attribute editor of the light. since the light is limited by the shade, you don't want it to be too soft, but the extreme edges in your render aren't quite correct either.