DDS has been invented by Microsoft as DirectX texture format. DDS files are loaded with highspeed into the graphics card memory because its is saved in the native graphics card file format (so to say). DDS files are as well compressed, so if they are e.g. 36kb big, they take only 36kb of graphics memory. DDS tools allow natively to create mipmaps and store them as well in the DDS file, so time is saved again when loading it. I dont know which tool you use, but I prefer using the ATI compressonator for solid textures.

Dont use MDL5, it is added in the MED export/import list only for historical reasons. The engine is optimized for MDL7 loading.