There are two major physical systems which interact to form terrain on Earth -- large-scale tectonics processes (plate tectonics), and erosion by water (hydrology). Both processes can be simulated to create realistic terrain. Additional minor processes can be added, if desired (e.g. meteor impacts).
These processes can be simulated, usually on a grid, or can be faked directly. Simulation is fairly straightforward, once the equations have been determined, but it takes a lot of computation time (think of running SimEarth through 4 or 5 billion years just to build your map). Faking the results of these processes should be faster, but the methods I've seen for doing this are either small-scale or unsatisfying (and I'm hoping someone will prove me wrong soon).
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© 1996 cburke@mitre.org