To answer both of your questions; I do not edit the graphics themselves. I edit the palette they use itself! You know, this thing.
I load up the palette in SLADE, and then I can change each RGB value of each color. Doing this changes every color in all graphics. Just load up a mod that adds new graphics along side this and it'll be recolored as well.
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Double posting here; but new version out.
VERSION 2 INCLUDES...
Less intense, eye-straining yellow!
Better darker shades for the Cyan skin color!
Blood orange (yes, blood orange) highlights for red to make it pop out!
Higher contrast orange!
New tan color!
New neon green!
Better fading for purple!
Some different FLASHPAL for Lua scripters than previous releases!
And a lot of other stuff I forgotten about!
I actually kinda dig the blood orange highlights, if I do say myself. It makes Knuckles head have more contrast and fires look a little more orange.
But, yeah, go get it.