When Can You Not Use DDS?

There are a few cases where you cannot use DDS files in X-Plane:

1. Airplane 2-d panels (any layer - base, lit, -1 shadow layer, 2-d or 3-d).
2. Airplane instrument images.
   
3. Bitmap-based region specification referenced in a library.txt file.
4. Any gray-scale/alpha-only texture (e.g. mask files in the scenery system).
   

Beta 17 is treating cases 1 & 2 as an error; beta 18 will simply stop looking for DDS files in those cases.

Please note that airplane panels and instruments are not compressed right now, so there would be no performance benefit to using DDS in these cases. (If anything, PNG has smaller file size when compression is not used.) If we ever allow compressed panel textures, we'll probably allow DDS panels at the same time.

Case 3 is just a particular version of case 4 - that is, the region bitmap is black and white (1 channel) so DDS provides no benefit. Use a gray-scale no-alpha PNG!