Hello Donor
I followed your advice by not changing it in DXTBmp first. Just opened the dds file in DXTBmp, sent it to Photoshop, made my changes, flatten it, save it in Photoshop (it got saved as a 24bit bmp)
Opened the bmp in DXTBmp... I'm not sure what you meant by refresh it other than click on refresh Alpha under the Alpha tag which I did. Then saved it as a dds using DXT5 format and ended up with the same problem.