Are you sure you're not confusing the quality difference between point-sampled filtering (software modes do this) and bilinear filtering (which what all 3D accelerators do at some level)?

Some screenshots would be nice to determine what the quality loss really is.

I might confuse things since it's been a long time when i played this game last time.

Here's screenshot with software renderer

and with hardware renderer

Wow that's definitely lower resolution textures, yes.

No experience with the game though, sorry :$

I do remember games used to have different patches for mods for textures to make them work for voodoo cards due to their texture limitations so maybe it is something to do with that?
I only know this due to seeing voodoo specific versions of grand prix legends mods etc.
So i'm probably talking crap haha

Sorry i can't be of more help

That almost looks like it's trying to compensate for low VRAM... Kinda reminds me of what I'76 looks like if you use Direct3D, compared to 3DFX Glide. (Infact alot of early Direct3D games did that.. Very low res assets for D3D but not for Glide)

I'd have to look at this games textures directly to judge properly but I'm finding it hard to believe the texture quality being bad on HW mode. That doesn't look like 256x256 at all.

Checked it with directx 8 and latest AmigaMerlin drivers for 9x and no change at all, also messed with 3dfx tools for direct3d, no matter what i changed they had literrally no effect on graphics quality. I'll swap this voodoo3 for savage4 later today and will post a screenshot just to compare differences between these two.

EDIT

Tested it with drivers version 1.03 and it looked much better, textures were still blurried but it could just be bilinear filtering. Pixelation added to image was gone, i suppose it caused that ugly look in hardware mode. Tho the 1.03 driver gives me problems with other games like Croc so i suppose there's no compromise to have everything working as it should at a time. Tested also x3dfx and 1.05-1.06 drivers, they all add pixelation to image, any tweaking with 3dfx Tools or V.Control makes no difference at all.

EDIT 2

It seems best option to play Direct3D games is to use 1.03.05 driver. No issues with other games so far.