it is possible to manipulate normals runtime by the d3dvertex struct, see manual at ent_getvertex / ent_setvertex. e.g. I modify tree leaf normals runtime to be more realistic.
as I know, normals are stored in the mdl file. if you import e.g. an .fbx file to MED with custom normals, they are kept. but there is an option in MED somewhere to update normals, which calls (I think) the directx ComputeNormals (which is also available to be called runtime), that calculates the vertex normals as the average of the neighbouring 3 faces (hopefully I'm correct).