I export stock UT2004 textures and then re save them as bitmaps for use in Max. In both max 6 & 7, .DDS files appear kinda milky when they are rendered.
The Nvidia site had a better DDS.bmi for max5 than the one that Discreet shipped. They offer the source too, so maybe you could recompile it for max 7... http://developer.nvidia.com/object/nv_texture_tools.html
Actually I'm getting the .dds files as exports from UED. I had not problem with max 5. But max 7 seems to have a problem with them. I've read around a little and it seems there is a problem with the .dds I/O in max7. Sp1 was supposed to fix it, but it doesnt' want to work with my copy.