That's exactly it. You have to use Doom's palette when creating graphics, otherwise when you load it into your wad with XWE or whatever, it will try to match any colors not in the palette with what it thinks are close aproximations. In your case, a dark red is the closest color.
In photoshop, what you do is take the image, set it to the RGP color mode, delete the Doom transparency cyan from it so you see the little Photoshop transparency squares. Then when your satisfied with the way it looks, change the image mode to Indexed with Transparency. Once thats done, clean it up with the eraser on pencil mode, and then save it as a PNG. THen when you load it into XWE, load it as Raw data. It will look all messed up when viewing it in XWE, but dont let it fool you, you'll also have to align it my hand if it isnt a 320x200 file.
Does it work in the same manner? Personally, I wouldn't know as much, since EDGE is not my specialty. Last time I checked though, the actual image files for the weapon using .PNG's had to be outside the wad or something like that.
No, I have already made 3 weapons while waiting for him to make his mace, and I too have begun normal school. He said he was going to make the mace next, so I shall wait.