That's very odd, it should work. Then again, there's lots of things in computing that "should" work, but anyway...Just checking one thing: you are pressing the "scale" button at the bottom of the scale image dialogue, aren't you? I'm not trying to be clever, it's something that I somehow manage not to do myself on occasion so I thought it was worth checking.Bear in mind, however, that if your source image is under 1024x1024 there's no point scaling it up as that'll just add to the overall mushiness: my comment was based on the assumption that you had a nice big source image and you were downscaling it for your DDS, but I thought it was worth mentioning (I hope none of this is stuff you're already well familiar with, I'm afraid I've no idea of your Gimp skills... and mine aren't that amazing, FWIW).
I did press the scale button and my source images are vanilla .dds oblivion ones. I guess my next question is, do I need to resave these images to .psd or png to resize the resolution?