To dig out this old thread: the decal seems to be ok. It just looks strange on the image, but when you move close to the terrain, you see that it is mapped correctly to the terrain surface.

The strange gaps and distortions in the decal are caused by the steep peaks in your terrain, and a hit.nx decal normal that is not perpendicular to the terrain. Only surfaces oriented towards the decal normal get painted over. The critical angle is about 85 degrees, and some sides of the peaks are over the limit - therefore the gaps. You can not map a decal on much steeper angles because at 90 degrees the decal would become infinitely long.