When you boot up your graphics mode, add a textout or textprintf line to show you the results of a get_color_depth() call. It sounds to me that your computer doesn't like 24-Bit or 32-Bit graphics modes. (Which can sometimes be caused by incorrect video or monitor drivers.)
In 8-bit mode, the background colour needs to be palette entry 0, which would be one way to explain why the magic pink isn't disappearing.
Also, if it isn't liking 24-Bit or 32-Bit colour, try running the program in a window and you may have better luck.
EDIT: Oh wait... you are, aren't you? Maybe you should try full-screen then...
EDIT: Waitaminute... I think I recognize this problem. I believe masked_blit() requires that the bitmaps and the screen be the same colour depth... the images look as though you're trying to blit 32-Bit data onto an 8 or 16-bit surface. Is your desktop colour depth set to 8 or 16-Bit?
--- Kris Asick (Gemini)