It appears that there is a bug in the internal imagelist that MMC 3.0 uses to store the 16x16 icons. From what I understand XP icons are RGBA bitmaps and use the AlphaBlend API. Regular bitmaps use the BitBlt API. The XP Alpha icons show up with a black background. Any icons that I converted from alpha to 256 using the auto conversion feature in Axialis IconWorkshop.

The workaround I found, is to change the palette of these icons into a true 256 palette. I chose the Windows XP.axct from the palettes listed in the file dialog. This seems to fix the black background when the icons are shown in MMC. I only did this for the 16x16, and left the 32x32 icons untouched.

What a pain in the ass!

PS. I wish I had a freaking spell checker built into this!!!