A DEM (digital elevation model) is a raster that represents elevations.
For terrain processing for hydrology, start with the DEM and go from there. I suggest downloading ArcHydro. You can get it via the HEC-GeoHMS installation http://www.hec.usace.army.mil/software/hec-geohms/download.html. HEC-GeoHMS has some terrain processing tools also, some of the same functionality as ArcHydro, but simplified. HEC-GeoHMS is intended to manipulate the GIS layers to eventually export to HEC-HMS for hydrology modeling outside of ArcMap.