The only other two programs I know of that can touch them at all are Photoshop and GIMP, both of which are horrible pains to work in.
I wouldn't say that, quite an opposite actually, but oh well...
And the difference between DXT3 and DXT5, is how those handle alpha channels. DXT3 is suited for sharp alpha transitions (when you have shapes drawn with hard lines, well defined and solid areas, etc.). While DXT5 can handle all transparency gradients very well (all those smooth tonal changes, etc.), and DXT3 can't have smooth gradients.
For Oblivion it's good to use DXT1 when there's no any need for alpha, and DXT5 for all the transparency (I do not even remember when I used DXT3 for the last time ;]).