I load image files into the tetures by calling LockRect and using a software blit program I made. How to I use texture compression, do I just set the color format? also, does D3D automatically generate mipmaps or is that only the D3DX functions?

Well I figured it out for myself! you load the image into a temporary IDirect3DSurface8, then create the texture with the DXT flag and mipmap level. For each level get the surface (GetSurfaceLevel) and copy the image (D3DXLoadSurfaceFromSurface)

I think mipmaps are enabled automatically, becasue it looks better already!