You get problems with DXT1 for 1 bit alpha if you want to add filtering to the texture (around the edges, the pixels with alpha 0 are assumed to be black, by the hardware, you can't specify a non-black transparent fill colour). I saw an article about using a different source/dest blending equation for that case but after bouncing back and forth between myself (tools dept.) and the graphics guy we failed to come to a conclusion that it would be a satisfactory solution. I can't recall the exact reasons why I was convinced to drop it in favour of a DXT5 with a uniform colour for the transparent parts of the bitmap (may have been tools change hassle combined with needless worrying on the graphics dept. side).
With DXT1 transparencies, and the black outlines, this is something that always annoys me when I see it in other games, because it's an easy fix.
The solution is that instead of using alpha blending (result = src*a + dst*(1-a)), you need to use pre-multiplied alpha blending (result = src + dst*(1-a)).
Pre-multiplied alpha blending is actually much more versatile, as it allows you to render both regular "alpha" style effects (e.g. smoke) and additive style effects (e.g. fire) at the same time (no need for each of these to use it's own blend mode). You can even pre-paint smoke and fire onto the same sprite/texture if you want to.
