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Greetings Andy:
Before we get into this, let me ask you a question:
Why isn't your friend here posting instead of you?
OK, it sounds like we're dealing with two seperate problems: Graphics quality and missing objects.
Graphics quality/degredation can be caused by the graphics card itself (not all cards are created equal--or more specifically, render the same objects with the same results--note that not all "3D" cards are 3D graphics accelerators). Another cause of poor rendering quality is improper graphics settings (low color depth, 3D disabled, low resolution, texture settings too low, etc.).
If all of those check out, some graphics cards can only run in 3D mode while in full screen mode. The most notorious are the earlier 3dFX cards (which you'd switch to full screen using Alt + Enter).
Regarding missing scenery, you did mention that your friend did a custom install. Typically missing scenery (missing objects) is caused by a less than full scenery install and starting the game or more accurately changing locations without having appropriate CD-ROM in the system so FS2K can read the correct scenery files. (If FS2K can't read the scenery file, it'll just display some generic tiles with no objects or NAVAIDs.)
Hope this helps!
Ben