I posted this tutorial in the Oblivion TU thread, thought it might be useful here too:
Something simple I came up with, an easy way to create decent cloud textures (transparent and tileable, so they can be used in Oblivion and Morrowind).
First of all, if you don't already have it, http://nifelheim.dyndns.org/~cocidius/dds/#download. It's been significantly improved and is now completely bug-free and works extraordinary.
1) Go to "File -> New...", set width and height to 1024 (or whatever power of 2 you want it to be) and click OK.
2) Go to "Filters -> Render -> Clouds -> Solid Noise...".
3) Make sure that "Randomize" and "Tileable" are checked and "Turbulent" is
unchecked. Increase "Detail" value to maximum, which is 15. Values "X size" and "Y size" depend on how big you want your clouds to be. This affects
only the size of your clouds, you'll be able to control their density later. If you want many tiny clouds, make these two values higher, and if you want few big clouds, make them smaller. But whatever you do, these two values should be the same (clouds look weird otherwise). When you've chosen the value for "X size" and "Y size", click OK.
4) Select the "Layers, Channels, Paths..." window, right-click on the current (the only one) layer and click on "Duplicate Layer". Select the new layer (most probably named "Background copy"), and in the top of the window change its mode to "Burn". Make sure that the new layer is selected before proceeding to the next step.
5) In the image window, go to "Colors -> Curves...".
6) This is the part where you can choose the density of your clouds. In the newly opened window click anywhere on the graph (except on the points in the lower-left and uppper-right) to create a new point. Move that point around and observe how the image changes ("Preview" should be ticked). The higher you place the point, the denser the clouds become. As you go lower with the point, clouds become thinner. You can also remove that point by dragging it off the graph to the left or right and move only the two existing points to see how that affects your clouds, or add even more points to the graph. The method which I found gives the best results is to not add any points and move only the already existing point in the lower-left, to the right along the bottom if you want your clouds to be thinner, and up along the left edge if you want your clouds to be thicker. Play with this graph until you're satisfied with how your clouds look, and when you are, click OK.
7) Select the "Layers, Channels, Paths..." window again, right-click on any of the two layers and select "Flatten Image".
8) In the image window go to "Colors -> Color to Alpha...".
9) For colour that will go to alpha select black by clicking on that rectangle and sliding the V slider all the way to the left, and clicking OK. Click OK to apply the effect.
10) That's it. All you need to do now is save your image as [whatever].dds, for "Compression" choose "None" or "BC3 / DXT5", check "Generate mipmaps", and click OK. There - you just made a fine clouds texture.