The FSX.CFG File is located in the users application data path:
C:\Documents and Settings\username\Application Data\Microsoft\FSX
Other reasons for "The Blurries" may include:
Exhaustion of video memory.
If a particular scene requires more video memory than your video card has available, the Flight Simulator graphics engine has no choice but to remove some of the highest resolution mipmaps from video memory to save space, leaving only lower-resolution mipmaps for rendering. This usually appears as a sudden change. One moment, all the textures in the scene are sharp and full-resolution and suddenly everything becomes more blurry. It can also get progressively worse over several frames as FS works to fit more textures into video memory.
There are several ways to combat this problem.
a) If you are running at a very high screen resolution, lower it slightly to free up additional video memory.
b) Some video cards use lots of video memory for anti-aliasing, so try turning it off.
c) Turn down the setting of the "Global Max Texture Size" slider.
d) Lower the setting of the AutoGen and scenery complexity sliders.
e) Reduce the setting of the terrain texture resolution slider.
f) Turn down the amount of AI traffic.
Poor filtering settings.
Unfortunately, not all video cards and drivers respond the same way when Flight Simulator interacts with Direct3D to set up bilinear, trilinear, or anisotropic filtering. This means that in spite of our best efforts, the texture filter on your video card may not be set up to perform optimally. This can result in textures looking excessively blurry when viewed at an oblique angle. To fix this, try each of the different filter modes (bilinear, trilinear, anisotropic) to see if any of them perform better. If not, then try overriding Flight Simulator's filter settings with the settings in your display driver. You can do this with ATI and NVIDIA drivers by clicking on the ATI or NVIDIA icon in the tray next to the clock on your desktop and making the appropriate selections.