I downloaded this mod

http://www.tesnexus.com/downloads/file.php?id=1671

a simple backpack mod..

but all there is in the DL'd texture file is a picture (bitmap image) which seems wrong. (ie no DDS file)

I need to reinstall MW so I cant test it yet.

I don't know for sure, but I think he just uses standard morrowind textures in the meshes, and therefore didn't need to include any textures himself, which would make them work with texture replacers as well.

And .bmp files are recognized by Morrowind.

Like Pluto says, BMP files are readable. Morrowind supports BMP, TGA, and DDS.