From the TNG Technical Manual;
Matter conversion subsystem creates physical props using replicators. Replicated props are generally created when an object is likely to be touched by the participant. Some props are animated under computer control by precision-guided tractor beams.
Holographic imagery subsystem creates three-dimensional images of simulated environments. Shaped forcebeams give physical substance to foreground objects so they have the illusion of being solid.
Substrate forcefield creates "treadmill" effect, permitting participant to remain stationary while the simulated environment "scrolls" by within the limits of the simulation program.
