http://en.wikipedia.org/?title=Heightfield

used in Flash
http://lab.parkstudio.ru/terra/

the trick is to show it from a different perspective, other than from plain top (that would hide the depth difference).

try some simple perspective shifting along the x-axis rotation just like Command % Conquer 1 & 2 or the Total Annihilation game. Seeing it slightly from the side and the top allows you then to slide the characters & items along the y-axis in flash to fake height & depth.


software:
http://terraineer.sourceforge.net/
http://www.world-machine.com/gallery.html
http://nemesis.thewavelength.net/index.php?p=8
http://www.localblooddrive.co.uk/