Hi Steve. Like you I've done this many times but I use the the Nvidia plug-in in Photoshop, so I can only offer limited help, and, in any case, you're much better than I am at this!
It looks to me as if one of the channels has corrupted during final conversion to .dds; best guess would be the alpha channel. Have you checked the channels for distortion? I have sometimes found that copying rivet lines distorts them quite badly in older versions of Photoshop so you could look at how you copied, say, the red channel to a new sheet for the alpha channel.
If you use Martin Wright's Dxtbmp app. to convert maybe you could try a different dds conversion tool. I guess, as a last resort, you could take a trial of Photoshop and the Nvidia Texture Tools plug-in; I can walk you through it.....!
Best of luck
DaveQ
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