Roger that, Easyscor... Wabbit's utilty is the best simple way to go here. I use a really convoluted and complicated process of connecting the TYP portion of a terrain to the ELV portion... it wouldn't even be worth explaining unless you were a hardcore PhotoShop user. But if you don't have to worry about getting coastlines just right (like I do) Wabbit's utility is a blessing. (the problem here is that much land is at level 0... Wabbit's utility automatically makes anything at 0 into a water tile, and many times you just don't want that)
JB73... the left image is from USGS DTED data, and exported as a TIF. I made the right example just by using the Emboss filter in PhotoShop.
Nuttz, that can smooth out the hard-edged contrast in a file, but it doesn't change the fact that darker pixels have been introduced to the data. Darker pixels = lower elevation, so every shadow has become a hole. Blur it and you get a blurry, smooth hole. It's far better to just make sure your data is clean to begin with.
And if you are painting from scratch like JB73 is, that should be easy.