I've noticed that the AO option in game doesn't change the IQ of the game if I enable it. But I've seen r_shadows also performing what AO does in game which also causes a massive hit in performance. What's the deal...can you comment on this?

Using the console command I turned shadows off by using r_shadows 0
http://img215.imageshack.us/i/shadowsoff.jpg/

But when use the console command to turn them on (r_shadows 1) I get this:
http://img850.imageshack.us/i/shadowson.jpg/

As you can see above that's not shadows but Ambient Occlusion. Look at the corners and certain objects themselves when comparing the two (place each pic in it's own tab) and you will notice that shadow is being applied similarly to what AO does to objects. The thing is that when using AO from the game menu doesn't work at all for me. So what's going on?

I wanted to also add that this was done using the console "~" option and just typing in r_shadows 1 or 0 provided instant results as shown in the pics above.