Yeah, I do make that distinction a bit already (mountain vs. hill). What I was thinking is, instead of having a black pixel to stand in for the hills' shadows, maybe actually make a shadow with varying opacity. I think my only concern there would be if it made the converted .png filesize swell exponentially... Oh well.
I've actually gotten some crap in the past for only having two kinds of mountains; my philosophy is a) ancient peoples would have no way of knowing exact (or even approximate) elevation, and b) this way lets people invent their own stories about the local terrain, rather than putting all the creative control in my hands.