Always save your textures in lossless formats, such as PNG, TGA, or PSD; avoid lossy formats such as JPG, even though they're typically smaller in file size. JPG may be ideal for website images or for sending holiday snaps to your friends and family but for creating video game textures, they are problematic--they lose quality exponentially with each successive save operation. By using lossless formats and removing JPG from every step of your workflow (including the intermediary steps), your textures can remain crisp and sharp:
Saving textures to PNG files
