It displays fine, but the decal texture seems to be unaffected by light (is not shaded). Does anyone know why this is? Am I missing something obvious? Or does anyone know a different way of layering multiple textures by alpha channel that is then rendered once as a combined texture? Or would this require custom shaders?
The problem is that the fixed-function texture pipeline runs after lighting, not before. So anything that is not “modulate” will effectively overwrite the results of lighting.
You can mess about with combine modes, but the best fix is to write a shader.