You did just right Androo.Timetraveller, the other evening, before I saw this tutorial (doh!), I had a go at an RN White Ensign flag. What I did was import the default LFN flag into DXTbmp and then, in MS Paint, cut and pasted it into the flag I wanted (except for the blue, which I painted myself). Then back into DXTbmp, then to Enigma ripper and into the game. It seems to work fine and I think looks good, but: I did absolutely nothing with the alpha channel. Is this a problem? Anyway from now on, I will follow this tute.
In most cases, the alpha channel never needs to be modified. It is saved automatically when resaving the file through dxtBMP.
TT