I'm glad this one has a happy ending. Here is some clarification on the editor's behavior.
When you start the editor for the first time, it loads every image from the DefaultArt folder.
When you save a design, the editor copies the used images to the design folder and then alters every image reference so that it points to the copy in the design folder.
Now the DefaultArt images are out of the loop entirely, as the editor will now load the design images from the design folder every time.
If you select a custom image into an event (or whatever), the editor will continue to reference the location of your custom image until you save the design. Then it copies your custom image to the design folder and updates the image reference.
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CocoaSpud
Dungeon Craft Development Team
http://uaf.sourceforge.net