//Pixel Shader
float4 ps_lighting(VS_OUTPUT IN) : COLOR0
{
	//float4 color = tex2D(DiffuseSampler, IN.tex0);
 
	//opacity
	float opacity = GlobalOpacity; //default is global opacity

	//diffuse
	float4 color = float4(diffuseColor); //default diffusecolor
 

	color = lerp(color, color*IN.color, VertexDiffuse);

	//Create Light Calculations
	CreateLights( IN.worldSpacePos ); // fill lightstruct array DOES NOT WORK IN VERTEX SHADER, MUST HAPPEN IN PIXEL SHADER! ~0_o>

	float3 normal = IN.worldNormal; //default worldspace vertex normal

	normal = normalize( normal );

 	//Diffuse Fresnel
	
	float diffusefresnel = saturate(diffuseFresnelMult*fresnel(normal, IN.eyeVec, diffuseFresnelPower, 0));
	color = lerp(color, diffusefresnelColor, diffusefresnel);
	 
	//Light Loop
	float4 ambient = { 1.0f, 1.0f, 1.0f, 1.0f };
 	ambient = float4(ambientcolor, 1.0f);
 	float4 totaldiffuse =  ambient; //start off with ambient color

	for(int i = 0; i < numberOfActiveLights; ++i) //for loop to iterate over our 3 lights
	{
		//	float4 emissive = lightsarray[i].ke;
		float diffuse;

	    //ambient = lightsarray[i].ka*ambientcolor;
		
		float3 L = normalize(-lightDirection);

		// Spot light
		diffuse = diffuselight(normal,lightsarray[i].LightVec);
		 
		// Directional light
		//diffuse = diffuselight(normal,L);

		totaldiffuse += (diffuse*lightsarray[i].LightColor);
 
	}
	 
	//Apply Lighting
	
	float4 ret = color; // our final returned color starts as unlit diffuse color
	 
	ret = float4(pow(ret.x,Gamma),pow(ret.y,Gamma),pow(ret.z,Gamma),ret.a);
 	ret.a = opacity; // finally set opacity
	ret.rgb*=(totaldiffuse); //multiply diffuse with color
	ret = pow(ret,1.0/Gamma);
	
	return ret; //all done, return result :)
	 
}

The logic is this.
1) Setting global opacity to 1.0
2) Interpolate the color from the vertex shader (IN.color) with the global material color(diffuseColor)
3) Create lights and normal for each vertex
4) Calculate total diffuse by multiplying the normal of the vertex with the light direction
5) Multiply the interpolated color with the total diffuse value(light)
6) Output the pixel

It looks real dumb like this, and the image is really jagged

How do I improve it? Any good ideas?
Thanks
Jack

It is hard to give you precise advices since you don't show the code for few of your functions.

However, there is something funny going on with the gamma correction. As far as I know, if you do your calculations in linear space you can skip all the gamma correction in the shader, assuming that the texture read gives you a texture color in linear space and that the back buffer is in SRGB format.

[Edit]

It seems that you don't calculate the specular factor or that you calculate it incorrectly.

Cheers!