Hi John,
The answer is perhaps more complex than you would think. Textures in .dds format are incompatible with FS2004. However this doesn't mean the model is incompatible with FS2004 as well.
Recently a FSX compatible upgrade from Thicko's Gloster Gladiator was released. It has 4096x4096 size textures in .dds format. Therefore it won't work in FS2004. However when you reduce the size of the textures to 1024x1024 and save them in extended .bmp format the model will work without any issue.
The other way round when you have a FS2004 model and what to fly it in FSX, you can change the texture format from extended .bmp format into .dds format without any problem.
I hope this answers your question,
Huub