Tilesets are a way of supporting very large terrain data.  The elevation and imagery are stored as a set of tiles in a regular grid, N x M in size.  The elevation and imagery must both be tilesets of the same grid size.

Where to put them:

Data Location
elevation tilesets (.ini and folder) Data/Elevation
image tilesets (.ini and folder) Data/GeoSpecific

It is good to avoid tiles which are very large (in heixels or texels), because there can be a significant pause (a fraction of a second) when each tile must be sent to the 3D card.  To avoid this, you can increase N and M (columns and rows of the grid) so that each tile is smaller.

In addition the base texture (which can be a tileset), if you have a modern graphics card with multi-texture, you can use Image Layers to overlay additional textures on your terrain.