Thanks for the inputs so far.
As it turns out, it "is" working for distribution based on slope, but the stones lose the full wrap of texture or color. It seems to place it only on their top face, very strange. If you do a quick render, you can see how the stones aren't colored all the way around. If you pull out the distribution shader, the stones are colored all the way around BUT are not affected by slope (which it what I am trying to achieve). Actually, Terragen's ability to add stuff based on slope or altitude is one of its main benefits in my opinion.
Here is a simple sample tgd file of whats going on.