First point. Images don't contain real elevation data, just numbers fro 0 to 255(0 to 65,536 for 16-bit), so you have to use the Mathematical>Span filter to tell Wilbur what span of heights the image represents. You can find a tutorial here to tell you how to save the data in a full precision binary format. You really want to avoid greyscale image files for elevation as much as possible.
Second point. You are now required to put up a tutorial on exactly how you did this:
here, but if you've come up with something that works better for small scale(large area) terrain, then me wantee!