I have gimp and photo shop and was trying to change the color of a bandanna mod item I have.

I decided to use the gimp .dds plugin because the other converters were all Nvidia products and I have a ATi Card and they didn't list any compatibility info. So anyways I pop the .dds open and this all looks familiar, I select the area I wanted to recolor then adjusted the hue and saturation levels to go from a Grey to a light blue.

So I boot up to look at the item and it's a empty black. I've re colored items in other games and this method usually works just fine any ideas?

First off, you don't need an nVidia card to use their .dds converter or normal map plugins. nVidia just happens to be the company who developed the plugin for photoshop. The choice between Gimp and Photoshop depends mostly on access and familiarity, photoshop is expensive software, gimp is free.

Second, textures in Oblivion have atleast 2 components to them, the Diffuse map which controls the "texture" image of the object and opacity, and the Normal map which controls "bumpyness" and "shinyness" of the object. There are a couple basic retexturing tutorials on the Wiki and I think Lhammonds has written one here, located under articles.