Youre using a 24bit bitmap image. It needs to be 8bit. Or a 16 bit RAW if you can get that shit working ha
In photoshop, (or god forbid GIMP) before saving, go "Image>Mode>Greyscale" then save as a 8bit BMP. Make sure not to save the PSD as a greyscale image. Always keep a RGB PSD copy.
Remind me sometime and I'll put up an in depth tutorial on here.
EDIT: Also. Download TESAnnwyn-0.21 and copy the tes3ltex.txt file from there. Just so you know, I only ever used 0.21, 0.23beta only adds Skyrim support afaik.
Lastly... You can use this GUI version of TESFaith to get a quick view of where your landscape is when its imported to a plugin. You can load multiple overlays and such. So you would just load Morrowind.esm and the Shotn landmass esm as overlays, then load roscrea. It does help.