I finally got everything for skinning to work...and I made some pretty cool ones already. I tried editing the red team's flag to put a mario face instead of the snake (just testing out what I can do). The file for the flag is a DXT2/DXT3 instead of the DXT1. So when I saved it and it prompted me to choose the DXT file, I had to choose DXT3 instead of DXT1 (HMT3 wouldn't let me inject it as a DXT1 file). Now, even though the flag has Mario's face on it, the bottom looks like weak cloth, and you can't see Mario's face from far away.
Soo....for anyone who's already done flags, what did you save it as?