I'm terribly sorry it didn't work properly for you snader.

Its odd that it worked perfecly fine for me and the other people makng skins as of about a year ago, but I just experimented with it to see if I could duplicate what you were talking about and for some reason it seems to now be much more sensative about the PNG's. (maybe a windows update since the time I had made it?)
I do know for a fact that the reason when you tried to replace an image with a blank image, it only seemed to change to the color was because it wasn't able to read your PNG at all ... as though it thought it was a completely fualty image file....which I'm sure it wasnt

Here's what I could figure out on my windows XP system.
1) If saving out and using indexed PNG files (from pro-motion in my case)<< it would only count pure black as transparent...even if another color was sent to transparnt, only black would be transparent in the demo.

2) The safest bet seems to be t save out 24 bit PNG's (even if you made it as indexed, just save it out as a 24 bit with transparency) This worked well from my old version of phtoshop. This also worked fine when replacing an imge with an empty image of the same name.
I'm really sorry you found this so late and that it now seems to be such a finicky program. It really would have been great to have anothr entry and I hate dissapointing people.
I'll be calling the contest offically finished at midnight French-time (where I live)