I have the registered version of Terragen. But I believe that limit only applies to rendering size- NOT export functionality- but I don't know for sure. I think exporting is not something Terragen restricts- but I haven't tested that myself.

Here's the dialog in Photoshop 8- more important steps-

1. I would recommend all editing be done in the 16 bit RAW state- including cropping and/or resizing to a PERFECT 4097 x 4097 square. Often DEMS and TER files are not perfect squares.

2. You should then convert the file FIRST to a an RGB Color file from Grayscale, and THEN convert it to an 8 bit RGB Color file. This is because I have found that VUE will create "stair cases" on 16 bit Grayscale or Color files (I have tried TGA and PSD as imports in the Vue Terrain Editor). Vue needs to impliment a better 16 bit IMPORT function into the Terrain Editor. This should NOT be hard to do as Vue already handles 48 bit rendering, HDRI-IBL etc.

Converting in Photoshop creates a smoothing of the data- but still looks very good- but TRUE 16 bits -like what Terragen does- would be better. In fact- the TER file is an "open" format and Vue could add this to their file import set I would hope...