Georeferencing only means the terrain is positioned at the correct place on the planet, without it the terrain is still "on the surface", it just shows up at the 0,0 coordinate origin.
The demo was done with Terragen 3.1 (not yet released, coming later in February) that has some improvements for working with DEM data when georeferenced and far away from the coordinate origin. Until the release of 3.1 it may be advisable to avoid Georeferencing unless you're certain you need it. Keep in mind that the primary benefit of georeferencing will be for real-world projects *that require a correct planetary context*, or for situations where you're trying to align multiple adjacent or overlapping DEMs. If you are only loading a single DEM tile and don't intend to ever view it from a planetary context, there's really no point in using georeferencing.
Richard, if you're aiming for real-world scales (terrain area as well as height), then you shouldn't ever need any heightfield modifiers on a georeferenced terrain. If you're not using georeferencing then you might. If you're having issues with incorrect scales when georeferenced, that's probably a bug and something for which we'd need some example files to look into it.
Last but not least, the National Map Viewer above is by far the best resource, both in terms of functionality/flexibility, and in my opinion in terms of ease of use for getting specific areas. Some places have data that is "easy" in that you just click a square and it downloads the data directly, but they lack the flexibility and modern data that the National Map Viewer has. So I'd strongly recommend figuring out whatever problems you might be having with that site and get it working, then learn to use it (it's fairly simple) as it really is the best option at present. Try finding 1/9 arc second NED data in easily usable form elsewhere...
- Oshyan