I'm in the first area for reference, but it seems like my pistol and all the soldiers weapons don't seem to do damage. The only way to hurt each other is by punching. Is this suppose to happen?

Ah ok never mind, I thought that you could just run the loader.exe without the start.exe, since it's faster, but that messes up the game. Finally... now I can use weapons!

talking about weapons, i got me the UZA-SH 11 lv1 upgrade 2 times, and both times it was gone the moment i reloaded the weapon. is that supposed to be so?

I don't think so, but you can manually change which level of the weapon you're using in the menus. I forget exactly how to do it but it's described in the manual. This is useful for some weapons, for example sometimes I preferred the level 2 UZA-SH with it's supre-fast firing rate to the level 3 which bounces bullets off walls.

Keep in mind that the level 2 UZA-SH fires really fast but then has to cool down. If you don't give it time to cool down it will begin to fire very slowly. Perhaps this made it seem that it had lost the upgrade?