Broken info_overlay texture

[dabmasterars]

When i try to place a custom overlay texture, it displays a broken image. The .vtf file uses "DXT1 with 1 bit alpha" and version 7.4.
The vmt file contains this:

"LightmappedGeneric"
{
    "$basetexture" "sign_airstrike2"
    $decal 1
    $vertexcolor 1
    $vertexalpha 1
}

The following images show:
Image 1: How the overlay looks in Hammer
Image 2: How it looks in-game
Image 3: How it's supposed to look

 

[Zeus]

when you saved it into a vtf did you enable mipmaps?

 

[dabmasterars]

when you saved it into a vtf did you enable mipmaps?

yes, in fact the texture changes when you get away (it's still a mess of pixels, but it looks different)

 

[dabmasterars]

My take is that it has something to do with "DXT1 one bit alpha" mode. For now, you should use DXT5 instead.