Happily, when last I left this particular project I had reached the point where I could start having some fun with it. I started by rewriting how the terrain layers are organized and implemented a straightforward midpoint displacement fractal to replace the half-assed nonsense I was using before. This particular method is in principle vulnerable to seams where information doesn't cross over the generation midpoints, but the sprites look so blocky anyway that it isn't an issue, so hooray! My short-term goal here is to add some XML for defining terrain information, so it's super-easy to add lots of different levels the user can fly around in. Besides selecting the sprites and tweaking the parameters for generating the landscape, I can also add entirely new generation methods -- for example, laying out a flat grid instead of a hilly countryside would work great for cities or farmland.
I've also had to work through some higher-level issues to figure out the goal of this project, based on the limitations of the engine. It has to a) be friendly towards retro-looking graphics, and b) be oriented around going fast, since this particular terrain engine looks its best when it's hurtling past you and you don't really have the opportunity to pick out the enormous flaws. I'm thinking some sort of combination of After Burner and Time Pilot here, though I'm eager to listen if anyone out there has any ideas as I'm a bit tapped game-design-wise right now.