Hi jspring
Have a look in the help section under Texturing basis,
Texturing Concepts
Two different types of textures are used in Microsoft Flight Simulator. The original format is a raw file containing one byte for each pixel of the texture. The images are 256 by 256 pixels in size. Each byte in the file is an index into a color table of 256 colors. All textures used in the same geographical area had to use the same set of 256 colors. Starting with FS2002, standard 256 color bitmap files (.bmp extension) can be used, each with containing its own palette of 256 colors. The size of the image must have a pixel dimensions of a power of two. Many designers choose to use 'square' file texture images. For instance, 256 x 256, 512 x 512, 1024 x 1024 are all popular texture sizes. 1024 x 1024 appears to be the limit.
Supported Textures
Flight Simulator can use a variety of texture files. This list shows whether FSDS is capable of handling these different formats:
8 bit standard BMP files
DDS texture files (won't display in FSDS)
16 bit standard BMP files
32 bit standard BMP files
24 bit bmp files DO NOT WORK either in FS or CFS2.
Acceptable resolution is any power of 2 up to 1024. The textures can be rectangular as long as both the horizontal and vertical sizes are a power of 2, ie: 1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024
For example, 32 x 256 is a supported size.