To use the SF260, yes you would have to have a copy of Microsoft's Flight Simulator. If you've never had a copy of it, what you get is an installation that looks like this:
You can see that there are numerous folders which stuff gets added to, for example there is a folder called 'SimObjects', inside that folder, there are several folders, such as 'Rotorcraft' and 'Airplanes'. If you bought the SF260, it would be installed in that folder and when you fired up Flight simulator, it would appear as one of the aircraft you could select and fly.
As standard, Flight simulator includes almost every airport in the world, and scenery for it all too, but much of it is generic 'tiled' stuff (it looks reasonably convincing, but it's isn't exactly what you'd see looking out of the window of a real aircraft flying over that location), which is where photorealistic scenery comes in. You can see that there is an 'Add on scenery' folder, so purchased add-on photorealistic scenery goes in there, and would appear in the simulation when you fired it up. Most of this photo-realistic scenery is similar to what you see on Google Earth.
Some screenshots: The Harrier is a freeware add-on aircraft flying over the default FSX terrain for the Grand Canyon. The ATR-72 Airliner is a payware add-on aircraft. The B-17 is a payware aircraft over the default FSX terrain for Seattle. The DC-3 is a repaint (by me) of the default FS9 DC-3 over photo-realistic terrain of the UK. The cockpit shot is from the B-17 that was over Seattle (and yes, all the switches do work in the cockpit!).
So, you are correct, Flight simulator is a 'base package' which you build on by adding stuff you like. Lots of add-on stuff is freely available, but the really well done stuff (such as the SF260) is payware.
Although the current version of Flight simulator is FSX (i.e. version 10), many people are still using FS9 (also known as FS2004: A Century of Flight). This is because FSX is very graphics intensive, and as a result frame rates aren't that great on mediocre systems with all the graphics whistles and bells turned up. So if you wanted to get into it, FS9 might be a better choice (certainly cheaper if you are just 'dipping your toe into the water'). The other thing to consider is that there are far more add-ons available for FS9 than for FSX (although many work in both versions).

Chock