It's always worth testing the very obvious, so forgive me if your response to this is "well obviously I checked that whap!"....
Is the texture called block.dds or Block.dds? Note the capitalisation. I'm pretty sure orbiter is case sensitive in this regard, so the mesh file is looking for block.dds, but if the texture is called Block.dds then it won't find what it's looking for...
Perhaps?
To be frank, I checked AFTER I read your post, but the texture was named correctly.
This is getting weird. How can it be that orb and I, open the same texture and it looks so different? I did not change any settings in photoshop and I opened it the same way I open all the dds files. :shrug: