EZRA It only technically works. Saving icons to PNG format seems dead. You're right about turning icons into black images when they get smaller. A work around for that seems to be saving the icon as a TIFF file, opening it in Preview, saving it again as a Photoshop file (via Preview, you don't need Photoshop), then pasting that back into CCI. For whatever reason, CCI can work with a pasted Photoshop images, but not certain desktop icons. That sucks, of course, but until they update it it seems to be the only way.
(Version 3.0.5)