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I have a new board that I have created and am looking for some more realism. It is based on WW1 European Trenches, and the battlefields of this era are pot marked with artillery craters and foxholes. I hoped to add some of these to my board, but have encountered a problem. I based the board, made of foam, in sand and sprayed it black and brown. The problem resulting from this is that the sand is bullet proof. I can stand on the board made out of styrofoam because of the sand. I can't chisel it out or I will crack the foam it half (I tried with unpleasant results) and I have tried melting it with acetone, to no avail (damn you impenetrable sand).

Anybody have an idea as to make a realistic crater in this plate of sand or something similar.

pick up some GW craters and paint them trhe same color of your board? As for trenches there is a great tutorial on how to make GS sanbags which can be used for them. All in all I think its better not to destroy your lovely game board with craters and trenches in the board but instead add things on top of it. If not then make another board.

try a Dremel or similar drill tool with a carving bit attached?

I agree with Clang, a dremel is your best bet.
If that doesn't cut it, i suppose you could always use a jigsaw.Carefully.