You can use a Geog Image Map Shader to load common image data formats over DEM data. Most commonly used is GeoTIFF, available for free from the USGS for the US and most of the rest of the world. DEM data that matches will also be available there.
However, I am not sure what you mean by "flight simulator". If you just want to use Terragen to load and "convert" the data then export it for use in something like a game engine, flight simulator, etc. then I don't think that will be possible at this time as Terragen does not support direct texture export. There are only semi-effective workarounds. I would recommend instead using something like GlobalMapper for that purpose.
If what you want to do is animate and render a flight simulator *style* video using Terragen, that is very possible. As long as you intend to render *in* Terragen.
- Oshyan
