Hi Martin,
It is the actual texture itself that looks messed up after it has been converted to DXT3, I.E if i draw a straight line on the source file textures, which i then save as 32bit to my textures of my aircraft i am painting, rather than just altering and enhancing the texture after it has been converted to DXT3 which always happened before on my old computer system, it now makes the line look like it has jagged edges along the lenth of the line plus makes the bmp look as i said like a 256 colour image
Regards Gerry

What does it look like if you save it as DXT3 without making any modifications?

DXT3 is a lossy format and is also 16 bit. This means that there are less shades available so you may get colour banding appearing (256 colour-like?). It also only supports 2 "true" colours in each 4x4 pixel block which can give rise to blockiness where there are 3 distinctly different colours in the same block.

Try the same conversion using the MS Imagetool program and see if you get similar results. If so then it may just be that what you are trying to do isn`t going to work well.

The only way I could check to see if it actually your machine /graphics card causing problems is if you send me the "before" 32 bit texture and the "after" DXT3 one. I can then try converting on my setup and see if I get different results with DXT3