Wait a minute Uli just emailed me back. It's not broke. Open the PNG is something that doesn't do transparency. Viola there's the background. (I opened it in UVMapper and a texture) It seems that if there is transparency data in the PNG that info takes precedent over actual image data.

Since you are using it for thumbs how about putting the image on a prop square in the background. Plug your background into the ambient color and black out everything else. Once you have that rig built it would be faster than processing all your thumbs.