Implementation
The Heightmaps
Outdoor terrain can be (efficiently) done in one of two ways - at least, two popular ways. The first is voxels, which have no problems displaying rolling terrain with any distances, trees, and the like. Since we don't have voxel accelerator cards (yet), voxels will run slow whether you're looking at a detailed mountain range or a flat plain. Worse, the voxels stay the same size, so pixels continue to get bigger and bigger as you approach - the fine looking tall grass in the distance will feel like a 3 foot thick tree trunk if you get too close.
Of course, the advantage is that you don't have to deal with implementing fog and level of detail to keep framerate up. Terrain won't disappear suddenly because of a clipping plane, and it won't warp and skew itself into the final, detailed form as you get closer.
However, because of 3D accelerators and their speed, most developers pick heightmaps as the method to create and display terrain. What are they? Well, we sent an email to Brandon and he came back with this short, simple answer:
Imagine a sheet broken up (what 3d programmers call tesselated) into triangles. Now raise and lower the points on the triangles to get mountains and valleys. That's a heightmap. A "map" or two-dimensional list of "heights" that describe how a surface changes elevation. If you break the surface up into really small triangles, you can get a lot of detail into the heightmap, making the terrain look smooth.
A Few Issues to Deal With
Heightmaps have one very serious drawback that we haven't mentioned yet. If you use a single map, you will never be able to make a vertical line. No matter how small you make the triangles dividing the map and how high you set one point of the triangle and how low another, you can't get a vertical line or anything steeper (ie, a ceiling or anything like that.) This makes building design impossible, and even a simple cave would be an incredible pain to try and make.
The solution for this is to use multiple maps. Two will allow you to make a circular cavern. Three will let you make a dent in its side, and so on.
However, to make buildings this way would be extremely tedious and annoying. Epic has retained the BSP capabilities of the Unreal engine for precisely this reason. The effect is much like the one found in Tribes - terrain is done by heightmaps, giving it a natural, flowing look and the performance is very good. Then you place BSP objects like buildings on this terrain to get the complete package.