Sorry for the long delay, got busy around here the last couple days...
Well sure enough - I CAN export a PSD from lightroom and open it in CS5 without any of the crazy artifacts and fringing etc. I can even use the "edit in Photoshop" function from lightroom after I import (synchronize) that PSD.
So happy this works and really appreciate for all your suggestions and troubleshooting.
Still don't understand why the "edit in" function won't work on the RAW file though....?