Can you describe the problem with other games? Take crysis for instance. The AA issue with GTA IV is well known.
About the 2 4850’s dying on you, I suspect they might have overheated to death. can you enable ATI overdrive in CCC and tell us your GPU/Memory temps? Also your system temps using Everest.
It is highly unlikely that poor image quality is due to any hardware problems.Hardware defects will only cause stability issues such as crashes and freeze ups.
Poor image quality is almost certainly some software based problem.It is possible that some older drivers are conflicting with your current drivers.
Check whether there is a file called “commandline.txt” in your GTA 4 directory.Any settings mentioned there will override those that you set from inside the game.
That looks like texture shimmering.
Clamp negative LOD bias settings in the display driver control panel if you are using an nVidia card. If you’re using an ATI card, then get ATI Tray Tools to do the same.
Also make sure you are using atleast 8x anisotropic filtering or the clamp won’t do much good.