I don't get why it doesn't work either... Make sure that when setting the modulation color you don't mess with the alpha channel somehow, though no idea how it could be affected (would need to know more about how your program works).
Also are you sure the red is more pale in the second pic? That looks more like an optical illusion because the background is brighter than black. Also, why do you need separate color and alpha? Black outline? Because if you just want a single color like in the second pic you could ditch the alpha altogether and stick to the single color channel (and halve memory usage, as a bonus).
EDIT: I think I know why it may not be working, is the texture in decal mode, by any chance? (wild guess here)