Looks like your in the wrong mode my friend.

in 'display00.wdl':
Code:

---

...
var 	video_depth = 16; // 16bit high-color
...

---

Have you tried setting this to 24 or 32. I had some similiar effects with skybox's.
Hope thats some help...

EDIT: Ok so I re-read your post, and see you already stated that you have tried the above But that's what it looks like, maybe you have another definition in your code, resetting it back to 16? Sorry I should read more carefully! LOL

Don't know for sure, but maybe it has to do with mipmaps viewed at some near-parallel angle? Straight on, it appears fine, at a no-so-steep angle, it has little distortions, but when nearly parallel, the distortions are extreme. If this is the case, it's supposedly how mipmaps are. I don't know for sure. If you mean the odd smoothing effect, the only way to fix this, or to make it less visible is to not have a hard edge. Use anti-aliasing in your texture or disable the filtering (check the "nofilter" flag, of which only works for models as far as I know).

Used TGA in wed it looked great but here's what I see in the engine...

thats an engine pallette/ color depth problem ( like its trying to work in 8 bit)

are you trying to use the textures in an OLDER already built level?

try the texture in a freashly built plain hollow block test build level.

Same thing in the hollow cube, and I set it to 32 depth in wdl.

Odd.

I'm just....confused now lol