First thing you’ll want to do is get rid of ‘two sided’. Two sided does nothing for sprites because they always face the camera, but it doubles your draw-calls for each particle emitter. In other words, it’s insanely expensive for no reason. I still to this day have no idea why it was enabled for EVERY material in Gears of War 1…
The particles appear to be shadowing correctly, but Lit Particles are only an approximation and you won’t get those results you posted there from using lots of small sprites together. To get that kind of effect, you might want to use fewer larger sprites or even a mesh, similarly to the way it’s achieved in the Elemental demo. Those offline shadows are done with Raytracing, whereas our realtime shadows use volume texture samples placed all over the level when lighting is built.
What you’ll need to do is play with the settings under 'Translucency Self-Shadowing to get the desired results. I find the ‘2’ value in the top-most box is usually a bit extreme, I tone it down to around .75-1.0 normally. Also, the more particles you emit, the less shadow ‘detail’ you’ll have because they’ll keep layering shadows on top of one another. The colour value also has a large effect, just play with those until you get it close 