For Anti Aliasing the engine uses the settings of you video card, so I would check the d3d-settings there.
If models appear too sharp in the distance, maybe they donīt have mipmaps. You can check this, if you load the models in MED:
Edit Menue >> Manage Skins, click on a skin, now the skin editor should display some information: size, color depth and - if they exist - mipmaps.
If there are no mipmaps you should create them, by clicking on "Skin Settings" then "Texture Format" and check the mipmaps check box. Donīt forget to save the model.
If nothing helps, maybe post a screenshot ...