To begin with, the DDS file isn’t really made for just storing images. You should think of it more as a format designed specifically with three-dimensional graphics in mind. The quality of the format isn’t great (in comparison to certain other formats), and it doesn’t compress especially well.
This may tempt you to wonder why it is used. Well, for one, the DDS format can remain compressed even after it is loaded into memory, unlike other image formats. This is useful for system performance. Another important feature is the support for alpha channels. These define transparencies and translucencies in an image, and are usually represented by a black-to-white gradated version of the image, where white is opaque and black is transparent (and all the shades in between).
Fable uses two kinds of DDS files: DXT1 and DXT3. The difference? DXT1 doesn’t use an alpha channel (technically, it can be saved with a 1-bit alpha channel, but you don’t need to concern yourself over that) and DXT3 uses explicit alpha. The importance of this should be obvious (alpha channels have been explained above) There is also a DXT5 (which uses interpolated alpha) but this is not used in Fable and is therefore not necessary for you to learn about.
Now you should know about MIP-maps, which are another important part of the DDS format. They’re not something to really be worried about, since you won’t be dealing with them directly, but you should be aware of them and what they’re for. MIP is simply short for multum in parvo, which is Latin for “much in a small space”. You can look at MIP-maps as being a kind of a pyramid of images, all ½ the size of the previos. They exist to increase rendering speed, simultaneously reducing artifacts. Typically, you get these generated automatically when saving in the DDS format, so you don’t really need to worry about these yourself.
When working with textures in Fable (especially DXT3) it can be good to work with them as DDS files. There are a number of utilities to open them in Photoshop. If you Google it you can probably find one in pretty short order.