Simulating Destructible Terrain with Brushes?

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Thanks for the feedback guys! I spent more time on the problem after my post and discovered the following...

By changing the yellow texture square to a half yellow and half red square, my terrain changed to an orange color. This indicated a scaling problem with the texture so I scaled it up to 512x512. After brushing the texture on to the terrain entity, I was presented with a half yellow / half red mesh. Progress!

Now that I've read the replies, I think jfk probably has what I need. Combining this with my scaling problem may do the trick. However, I too am concerned about the quality of the stretched texture. Are there any other solutions?

Ross, what are these decals you mentioned? Can you point me to an example or post some code I could try out?

-- x2