If you want something easy there plenty of ways to get an island for your game. I use blender to do most of my terrain and then export to milkshape to clean it up. I use blender just for the sculpting, ao and the baking of the textures. Here is a great site for doing terrains and other stuff for level design.
http://www.katsbits.com/
Here is a terrain editor that is free and I have heard that it was good, but I have yet to use it for fpsc. It exports in obj so you will need to convert it to x, but from what it seems it looks like a good terrain editor.
http://nemesis.thewavelength.net/index.php?p=8
I remember using this program when I first started with fpsc and it worked great from what I remember and it exports directly to .x.
http://www.generalfreeware.com/freeware/visual-terrain-maker-1218.htm
I hope this helps not only you, but everyone also. Here is something I just threw together for you. I used blender for the whole process and gimp for the final texture painting. Enjoy!
EDIT: If you make a terrain and your characters do not want to move or look like they are on pogo sticks, just add a simple floor and rest your terrain just slightly above the floor so the characters can walk on it. Also if you keep the flat parts of your terrain polys down it helps. Then it becomes more trial and error. I found out that what works for one person in fpsc, doesn't always work for someone else. Good luck!
