The LBM files in Total War are PackBits compressed. This was the original compression format used by Deluxe Paint by Electronic Arts. The IFF/LBM format changed somewhat when it ported over to windows, however a version of DeluxePaint was made for DOS (Trying to find a link for download.)
Paintshop Pro uses Run-Length-Encoded compression instead of the PackBits.
Anyways...the quickie good news is that I found 1 program which does edit the LBM files properly....[Drum Roll Please...] http://w3.ensil.unilim.fr/~maritaud/sunset/grafx2.html

I tested it only on the Fog.lbm so far, just a quicktest by turning the yin-yang from black&white to Red&Black. Seemed to work flawlessly! : ) If anyone else tries this program and it doesn't work, please let us know.

I am currently looking into what's involved in making a paintshop pro plugin, since that is the most popular image editing program among modders.

Scott McDonnell - out