Okay after messing with dxsupport.cfg I found a fix for the horrible low 
quality texture bug some people are getting in hammer with orangebox engine.

Extract dxsupport.cfg to SourceSDK\bin\orangebox\bin\
Then open it and on entry 10 - 14 replace the picmip lines with..
        "ConVar.mat_picmip"    "-1"
Then save it and test it out.

Works for me anyways.

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