By default, the plug-in does NOT use compression. Perhaps this isn't the best default behaviour, but the reason it does this is because you could, theoretically, save a VTF and then open it back up and edit it directly without any loss of quality. If you want to use compression, all you need do is select the appropriate DXT format or use the template feature. And BTW, DXT is a lossy compression algorithm, so the quality would not have been the same, it just might have looked it. (The whole point of DXT compression is that larger resolution textures look better than lower resolution textures even if the larger ones have some noise due to the compression. This, of course, does not apply to all textures, which is why the VTF format allows for so many image data formats.)
Anyways, I'm not trying to start a flame war here or detract from hessi's work. The point of my post was to shed some light on how Source textures work. You can't effectively make use of any tool unless you know the underlying process.
I neglected to say this in my first post, but nice work hessi. I played the beta release and I have to say it's one of the best looking Source maps I've seen. Great use of custom textures and custom models.
Oh, and yes, I am "the" Nemesis.
Nem