Why are PNG-8 files mangled when opened in Photoshop?
Solution 1:
It looks like the problem is that Photoshop doesn't support part of the PNG-8 standard. PNG-8 like GIF uses a 256 color pallet. Both formats support using one of those 256 indexed colors to represent transparency, PNG-8 also supports setting an alpha-value for each of those 256 colors on the pallete. Photoshop (apparently CS3 and CS4) doesn't support this and renders every pixel opaque.