This will be an excercise. you can texture map existing terrains and every surface layer but for this we're going to start fresh. so
close terragen if it's open to clear everything out of memory. If you have not downloaded the SO pack plugin, go to www.terrasource.net, find it and download it. unpack it into the terragen folder. do this while terragen is closed so it finds the plugin when it loads. You'll need it.
Now load terragen. look at the terrain window. right now it's black and shows the camera. the button under it has a number indicating how big it is. click on that button. on the menu that pops up, at the top, you'll see the number 513. for this exercise we're going to make a 513x513 terrain. why? because we need to know how bit the terrain is for the texture mapping and that's the size I use most often. so:
1. click on the 513 button. make sure render curved terrain is unchecked. then click ok. you'll get an are you sure? window popping up. tell it yes. then it'll ask if you want to resize your current terrain. since you dont have one, tell it no.
2. now generate a terrain. doesn't matter how but I tend to use subdivide and displace II, with erase first and generate new terrain clicked. I'll set realisim and smoothing all the way to the right, take the defaults for canyonization and glaciation and size of features. you set it up however you like. Once you have a generated terrain, if you feel like saving it, then playing with it in terraformer, go ahead. When you're satisfied with the terrain greyscale then go on to the next step.
3. now we'll find a texture to use. you can use free textures from the net, photos you've taken, fractals you've made, whatever. the only restrictions are that they be square and that they be in .bmp format. you'll need some kind of graphics program and if you're going to make them out of photos you probably want to download one of the seamless tile generators on the net cause otherwise they'll look wierd when rendered in terragen. Open your graphics program (I use paintshop) and go find the image you want to use as a texture (caution, putting your best friends face on a mountain might not be well received by said friend). the actual size of the image doesn't matter but smaller ones use less memory. but dimensions do. you could use a 25x25 or a 100x100 or a 1024x1024 or whatever. resize your image (if you need to) to be a square of some sort and then save it as a windows .bmp file (if you need help on how to do that, i need to know what graphics program you're using first).
4. now that you have an image to use as a texture map, go back to terragen. on the landscape windo, on the right at the bottom, you see the words surface map and under them 2 buttons...open and save. under those you see a small window and right now it only has 1 entry. the entry is called surface map and it should be hightlighted. this is the current suface layer. to the right of the small window you have several buttons, one of which is edit. click on edit and the surface map edit window will popup.
5. on the surface map edit window (called surface layer) you'll see the color of the current surface and next to it 2 buttons. colour and tex. click on tex (stands for texture). A small window will popup and you'll see a large white empty area. to the left of it you'll see 3 buttons (the edit button's about worthless) the + and x buttons will allow you to add effects and delete them. click on the + button and from the small menu that pops up choose SO Image Overlay (RGB Texture Version) (haven't played with the others yet so don't know how to make 'em work). The Set Image Overlay Options window will popup
6. on the window you have several choices for how your texture map is going to mix in with whatever surface you might already have defined for this layer. however since you dont HAVE a surface just click the first one which is Total Overlay Terragen Surface Map replaced with image (sounds like it's for the whole thing but it's just for this layer, not any other layers you've got going). now in the middle of this window you'll see where it says Terrain Size and gives you a number of sizes to pick. I had you make a 513x513 terrain (remember?) so click the circle next to 513.513. under the sizes you see Overlay Coverage Area and it gives you boxes for numbers next to starting and ending X and starting and ending Y. right now it shows 0's and 512's (programers start counting at 0 not 1 so 513x513 is really 0 to 512 both ways). this will cover your entire terrain with the texture. If you just wanted part of it covered you could specify that but since I haven't yet figured out how to tell what pixels are where and terragen insists on showing meters not pixels i'll let you experiment with that later if you like. for now leave the default numbers in those boxes. on the bottom of that window you see the word tiling and 2 boxes. this will tell terragen how many times to repeat the image. Now if your image is 513x513 you probably only want a 1 in each box. after all it's as big as the terrain. but if it's smaller, say 100x100 and you leave only a 1 in each box you're going to get a really really really streteched image. stretching 100x100 image over a 513x513 area is going to pixelate it and make it unrecognizable. on the other hand if you tell it to tile too many times you might wind up with something so small you can't figure out what it is. me, i use an image that's 200x200 and tile it 10 x and 10 y. seems to work ok. since I dont know how big your image you're gonna use for a texture map is, you'll have to decide how many times to tile the thing. (or go back into your graphics program, make it 200x200 and then set the tiling to 10x10 like I use). click ok when all the choices are filled in.
7. the window vanishes and a new window pops up showing your current folder on your hard drive. navigate around in it till you find the file you want to use for a texture map and click on it. You'll either get an error window or you'll get told how much memory it's going to use and how big it is. one way or the other the select window will close and you'll find yourself looking at small window that had a large white empty area in it. only now there will be one selection in it. The one you just made. If you get errors it'll probably be either you didn't save it as a windows .bmp format file or it's not square. The annoying thing about this plugin is that even though it provides you with an edit button, it doesn't let you edit the selection. if you get errors just click on the x button to delete the selection from the list and do it all over again (after you fix the texture image). Once you've gotten it to accept an image for a texture map click the big OK button. it'll vanish.
8. go render your terrain now. you might need to go back into the texture map functions and change the tiling or whatever to get it looking like you want it. Also move the camera around, try transparent and non transparent water.

now that you're familure with the basics there are a few things to be aware of.
first you can add many many surface layers and each layer can have texture maps AND as you saw, the selection window was fairly large. you can have lots of textures in that window so technicaly you can have a large number of texture maps for each surface layer. Less is more. go easy on it. And the color/bumpiness and mimic terrain selections of the surface layer seems to have some effect but so far i'm not sure how much.
play around with it. use a dark texture map for the base layer, put a child layer on it and use a light surface map. then switch and use a light one on the bottom and a dark one on top. experiment.