I have also noticed this destructive behaviour of MorphOS, which also affects a change to the Icon's Type, such as from Project to Tool or adding a Default Tool to a Project Icon - but no-one in the MOS Dev. Team seems to have commented on this issue in this thread.

So, I have sent a bug-report to bug HQ for this to be addressed.

As it is about time someone from the MOS Dev. Team commented in this thread and said it was being addressed, as Dual-State PNG icons for MorphOS is basically a fundamental aesthetic and functional feature, and if they don't work properly, in fact, delete the icon from existence and replace it with a generic "hammer & wrench" default icon then something is very very wrong with how such icons are being handled by the OS that we should be able to rely on to never do this!

I am surprised that no-one else has commented on this thread (including me), but then I only came across the issue personally a day ago, and was made aware that it had been spotted already, but I'm unaware if it has been spotted by the MOS Dev. Team already or if it has already been sent to bug HQ!

So, I've sent my report in so I can be sure I have done what I can to get this issue addressed ASAP.