Here is a really good summary of FS terrain, texture and objects:
http://www.fsinflight.com/FSI5%20CONTENT/FSI5%20SCENERY%20REVIEWS/JY%20BASE%20SC...

Article steps through earlier FS 'As (Un)Real as It Gets to FS9. Basically FS9 has terrain mesh, Land Class (texture), and objects beyond the aircraft and clouds.  Top of the visual heap is the photo images.  Southern California and several countries in Europe are available on the net.

Here is a site with a very good summary of terrain mesh:
http:/www.fs-traveler.com/welcome.shtml

Not only a good explanation, also some free downloads of terrain mesh to try. I loaded the Hawaii mesh and set FS9.CFG to TERRAIN_MAX_VERTEX_LEVEL=21 from the default level of 19.  Significantly improved. Terrain rendering is a matter of accuracy height derived from satellites.  Doesn't change the position of roads and some run up some steep grades where they wouldn't real world.  The site offers increased precision of terrain mesh of the USA for $35.  Note that increased terrain mesh precision means more polygons means more processing.  Runs well on my AMD 2000 powered machine at 24 FPS.

Does nothing to texture (LandClass) or to the quite ugly auto gen buildings and air fields.