You'll also need Photoshop with the dds plug-in.
Some people use GIMP, as long as it can save/open/edit .dds files, if it can't open/save/edit .dds files then you won't get the alpha channel which will make everything you edit go all shiny 'n crap.
@Pickletron: Just to clarify, you don't need PS/GIMP just to use Texmod to run mods other people have made, you only need them if you plan on making any mods yourself.