Somebody needs to tell me programmatically how to convert dds/tga to texture 2d. What it sounds like to me at least is that the original texture2d header is just tacked on to the new image after the fact. If this is the case then the flag to tell the game that a texture supports transparency is probably in the header somewhere. If not then the opposite is probably true in that the header inside the package that defines the texture has a flag in it that tells it to use transparencies.
Regardless the script inside the packages always links to the images by name, so I'm sure it wouldn't be terribly hard to do the swap like he did. (Which is brilliant btw).
Btw, with the exception of the minor glitch of the loading screens not working properly, (which I'm pretty sure is fixable), the new patch that gniarf made works perfectly. I tried it in both story mode and ladder mode, even finishing the game with classic jade... it worked fine without a hitch.
I've sent him a sample dlc file to play with, so hopefully he can get that working if he feels like giving it a try.