With a little trial and error and a ton of forum surfing this is what I have found and figured out:
Open painting program (I use PS CS4)
Create new 16 bit "Greyscale" document (power of 2, ie... 512x512, 1024x1024, 2048x2048, 4096x4096)
To designate water or land use the following RGB values
Water = 254,254,254
Land = 0,0,0
I use multiple layers to retain my land mass edges while editing certain aspects of design. I merge the layers prior to saving the document for testing within TE.
Select "Save As", chose your target location (AH3 Terrain directory/your terrain), chose the bit order you want (not really relevant anymore), I chose IBM PC and export it.
Fire up TE and import your new "Signed" .raw file.
Just rinse and repeat until you are satisfied with your building blocks.
<S>
Ciaphas