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So uh...this DDS format - photoshop can
convert a JPG file to DDS, right?



Dont use JPEG at all.. its a bad compression that usually makes texture look very bad if used at any stage.
you ought to start with pure 24 bit images, then compress it to DDS when its done. You can get a plugin for photoshop that will open and save dds files.

Sphere Engine--the premier A6 graphics plugin.