DXT1 does not support alpha channels, only a mask colour.
I am not an expert with DXT1 or anything, so I could be totally wrong here - but isn't there DXT1 with and without support for 1 Alpha Channel? I created an alpha channel in photoshop with the Warlord skin, and photoshop gave me the option to export as DXT1 with 1 alpha channel. When I imported this file in UnrealEd 2.1 and saved it as UTX to run in UT99, the Warlord appeared masked just fine. Maybe I am wrong about the details of why this is, but the point is that it seems to be working fine. I tried using a color for a masked texture (white, black, etc.), but it did not work. Only an alpha channel with DXT1 worked!
I looked back through it to refresh myself, and just noticed how borked the wiki page is.
Yes indeed it does have an RGBA option, so I believe my trials had lead me to believe it was better to use DXT3 and 5 for alpha channels due to them being made for it, not forced.
I stick to normal 24bit textures in DXT1 for highest compression ratio and use the others for transparency depending on the type.
From the official doc (better link)
http://www.oldunreal.com/editing/s3tc/ARB_texture_compression.pdf
http://www.oldunreal.com/editing/s3tc/ARB_texture_compression.doc
S3TC
Be aware that the enumerated format list is not necessarily the same as the list of supported formats. The main purpose of the format enumeration is to enumerate normal-looking formats so that an application can try them out without having any knowledge about specific extensions. This explains why the S3TC format enumeration doesnt refer to the GL_COMPRESSED_RGBA_S3TC_DXT1_EXT format, which is understood as not being a normal RGBA format.
I can't find the guide that explained the difference between DXT-3 and 5, but it made sense finally.
If you use an Alpha channel, it will not have the 8:1 compression, so because with 3 and 5 you don't get the option, it made sense to keep DXT-1 for solid textures or the classic masking.
When you import a masked texture, you must remember to edit the properties and remind it that it is masked, or it won't work.
I also am no expert with DDS/DXT, and from all I have found over the years, there aren't any in the Unreal Universe.
Until recently most people were still reducing to 8bit before importing into UEd for compression.
Actually, most people probably still are.