I'm not sure, but just make sure that your skins is power of two 256x256, or 512x512 - try it just for testing purpose, cause I remember facing 'bad file format' and problem was related to the skin. Additional it might be that skin is 8bit, change it to 24 in MED under skin settings, and it even might be that skin doesn't use RGB but something called Index (I've faced it with skins and textures from some older games). I'm not sure that this will help, but I just wanted to share my experience with this error message.

greets