The magic pink pixels must be 100% 255-0-255 and no transparency can be used. Magic pink images must be .bmp format.

You had it right when you got the white background. You just didn't have the right settings selected in skinstudio. Use a .png/tga image to get true transparency. There are checkboxes for transparency and translucency in skinstudio. check them both off for png images and just check off transparent when using a bmp.

Thank you Night Train,

the png worked.

I don't know what the deal was with the magic pink. I had it set to true 255 0 255, I had set the hue manually rather than just picking a color in the pink area. I did try using the transparent and translucent settings, the image was a .bmp but nothing seemed to work.

the solution was in the .png format. layer 1 tranparent, layer 2 image, layer 3 filter, merge down to one. Flattening the image was also part of the problem, that would render a white background also regardless of my setting in the studio, leaving as merged layers was the answer.