DXT texture compression
Had to register to reply in this thread - I hate to see these popular misconceptions about DXT texture compression continue.
Since I have worked for many years with the man who invented S3TC/DXTC texture compression, and continue to work with him on texture compression issues on a regular basis I consider myself reasonably informed about this.
To cut a long story short -
For colour only images there should be no difference in quality between DXT1 and any of the other DXT formats. The specification for the colour compression is identical across all these compressed formats.
Nutty's screenshots appear to be using a texture map that has an alpha channel as well, and the final image is being presented as the result of additively blending that channel onto the image. This is why DXT1 looks worse in this case - it only has 1 bit to represent the alpha channel, so it is either 1 or 0 (hence the sharp boundary around the white blob). I can guarantee that on ATI hardware there is no difference in colour compression quailty between DXT1 and DXT2/3/4/5.
This idea that the other DXT formats should be in some way superior for colour images is a complete fallacy. There was never any intention in the specification that DXT1 should have a lower quality of colour representation than any of the other DXT formats.