The problem is that Terragen was not able to store the path to your .ter file correctly. When I look at the .tgd file in a text editor, the line that points to the WM .ter file looks like this (on my computer):
filename = "H:\'‡ÈÎ˚ ǯËÌ˚\Terragen\Terragen 2.ter"
Unfortunately I think this is a limitation in the kinds of characters that Terragen can store (ASCII characters only unfortunately). We are going to improve support for other languages in future versions.
To solve the problem for now, you may need to create a separate folder on your hard drive for storing any files that you use in your Terragen scenes. For Terragen files, store them in folders with ASCII characters only (or English characters only), and do not use the '&' character.
Matt