If you are using stones that you have found then you can apply them directly to the model. For this tutoraial I have cast stones in rubber molds to get some interesting shapes. Here is a cast stone:

The shape of it is great but the color is definitely not what we want. It takes a little bit of practice to get the rocks to look real. Let me show you how to do it.

First paint some of the high areas of the rock with a dark gray color.

Then, while the paint is still wet, wash over the whole stone with water. This smudges the gray and makes it run.

Now apply some glue and sprinkle some green grass onto the stone. Finally, with glue, apply some larger textures of grass. This makes the appearance of brush clinging to the stone.

You are now ready to apply the stone to the diorama

Apply glue directly to the back of the stone and stick it right to the diorama. Now use your techniques for sprinkling materials onto the scene to hide the cracks around the stone. Make it appear seamless in the scene. Glue liberal amounts of dirt and grass around the edges of the stone. Repeat this process and place as many stones as desired.

Continue on to chapter 6: Flora and Fauna...

Here is a video that shows this part of the rock making process:

Lightweight Hydrocal

Lightweight Hydrocal has been specifically formulated for terrain model builders and is half the weight of traditional Hydrocal. Mix according to the instructions and pour into rock molds to create various formations. Also great for creating hard shell terrain and for filling in around rocks and other castings.

Will's Book on Diorama Making

How to Make Fantasy and Medieval Dioramas

This books shows you how to make fantasy and medieval dioramas using many commonly available tools and materials. There are over 100 pictures and illustrations showing you how to make great dioramas in fantasy and medieval styles. Chapters include basics, water effects, terrain tips and special effects like electricity and small motors. Tutorials include how to use foam, plaster of paris and paper mache to make great looking dioramas.