Workflow

This is the workflow I'm using for the fictional island I'm currently working on. I kind of made it up as I went along, and I'm far from finished, so I haven't actually performed all these steps yet, but it should point you in the right direction if you're not sure where to start. I don't have tips on making real-world islands as I haven't tried doing it and they don't really interest me right now, but if you look online there should be lots of resources and information regarding how to use DEMs and satellite images to create maps for other games (such as flight simulators).

I've only gotten up to the pre-road-laying heightfield editing myself, so don't hold too much stock in the parts after that.

Preliminaries

Know what you're going to do. Making up the island as you go along is fine if you're messing around with Visitor 3, but for the end result to feel consistent and realistic (if that's what you're aiming for) there really should be a plan of some sort.

I already knew I wanted to do something similar to ArmA 1's Sahrani, with a large (20x20km) island held by two nations and possibly a third, smaller island to mix things up. I started by drawing the coastlines of my island with pencil and paper. Remember that most common sizes of paper are rectangular, but ArmA maps must be square... though that's not really important, my initial sketch was rectangular and it still looked fine after being compressed into a square. Sometimes skewing and resizing a sketch makes the whole thing look more natural and realistic.

I scanned the sketch in, cleared it up and aligned it with Photoshop and then created a 2048x2048 Illustrator document. I then used the sketch as a background and traced the outlines as vector shapes. I put some very vague elevation cues in this sketch, as I knew more or less what sort of environment each area would have - farming plains, a rain-shadow desert, etc.. I then output the traced shapes as a 2048x2048 PNG.

Creating the terrain

You should probably use L3DT for all of your heightfield editing, as it is the de-facto tool of most island creators on the BI forums. The free version is quite generous and lets you edit heightfields up to 2048 pixels square, which is fine as it makes for a 20x20km island at 10m terrain grid size, which is about as big an island a single person can make at a decent level of detail.

I started by importing the coastlines-only version of the Illustrator sketch as a texture map. At this point you need to have a few things already decided on to avoid having to fiddle with the terrain.pbl settings later: what your highest point will be, and what the lowest point will be. When you create the terrain.pbl file you will need to tell Visitor what height absolute white and absolute black represent so it can scale the terrain appropriately, and it's easier to do this if the altitude in L3DT matches the altitude in Visitor.

I picked 712m as my highest point and -100m as my lowest point. I actually did this later on my own island, but it saves you work later on if you decide this at this point.