Poacher,
When you save it as a DXT3 file make sure you save the mip maps with it. This will give you the 86KB size.
I highly recommend getting DXTBMP program. It will heal all your ills with DDS conversions. You set your default paint program, export the dds file to it, make your changes, save it, and import it back into DXTBMP then save. It is a very user friendly program. I have been using it for years.
Link:
http://www.btinternet.com/~mnwright/programs/dxtbmp.htm
Hope this helps a bit.
WV