Okay, my software didn't record ingame, and editing and re-encoding the footage was much harder than just uploading the small initial file, so stop watching once I install the LOD, and refer to the screenshots instead.
Am I misunderstanding something, is something broken, or am I doing a step during generation wrong? :/
Also, does anyone have any tips for the region generator? I tried doing something similiar to Oblivion's regions. My parent objects are a few textures, and under them are larger objects that would fit that texture (large tree's for lush forest floor, small tree's for open fields, and rocky islands for dirt) then under those some smaller items. (Shrubs, stumps, branches, etc) However, when I generate all I get is the ONE parent texture with the highest density, all the textures are done in perfect 1024 unit squares, and the objects are in perfect rows... :F
Cool, that's all exactly right. And that light-blue, or bluish violet ( it's not purple

) actually is not the http://t3.gstatic.com/images?q=tbn:ANd9GcSGnIBP6mVvWgDZaAKOIckncTtbSgLOYq62gaZJTCcFqwPnDtOS AFAIK, that's something else, well, or they changed the color.
Okay, first) when you have a default texture there
is a texture (a pattern, something with contrast) and the 1x1 (if it'd be a problem) wouldn't even apply. So you're good with default textures.
Then second) I assume you can't see thumbnails of DDSs http://paradice-insight.us/stuff/oblivion/blank-lod.png, so if you generate PNGs instead, you can look at the contents of the "TEX-1024" folder. Okay you have two locations to check what's the surface-texture, a ) the preview of Oscape (Preview-tab, Surface-selector), it should be all brownish-green (with the default texture) and then b ) in the "TEX-1024" folder itself, which should be filed with lots and lots of tiles of brownish-green. PNG-normals are blueish, DDSs normals are greenish (G<->B swapped), c ) after install you can check the "terrain/worldspace" folder and you should find the same brown-greenish DDSs.
Now ...
if the default texture isn't dirt02, especially if it isn't a standard texture, Oscape may possibly not find the texture at all, but's unlikely, as the CK finds it I suppose, so it should be in "landscape". So
if you have black tiles instead of brownish-greens, we may have to figure out that one as well. If you find all the textures to be correct, we maybe need to play with the NIFs (BTR) as one guy previously reported the "Data/"-part should/could be removed. If that's the case we have another bug which probably will never be fixed, because Tamriel does work with "Data/", I got that from reverse-engineering the original Tamriel BTRs in the first place!
So. 1st ) Textures are okay through the whole pipeline (ends up okay in "terrain")? 2nd ) Textures are okay, but BTR not?
Testing with MERP shows all textures are produced correctly through all steps fe. But I didn't load it into Skyrim to check if they show up.
You see we are in the middle of the thick, progressing in tiny turtle steps, as in Oblivion.

Edit: What happens if you use 4x super-sampling (Menu->Settings->Texture super-samplig->4x)? You have to re-extract.