This result is due to the sharp contrast in color. It needs smoother transition in order to create rounded effect. Normal Maps can create the result you're looking for.

Here is a tutorial:
http://www.bencloward.com/tutorials_normal_maps4.shtml

and samples.......
http://search.live.com/images/results.aspx?q=normal+bump+maps&mkt=en-us

I'm sure others will have ideas also.

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Ockham's razor- It's that simple