I followed some parts of XDM configuration example at
http://www.bodenstab.org/xdm.html to change the appearance of my login screen.

I used this command to generate my xpm logo:
fig2dev -L xpm -m 0.5 /usr/share/examples/BSD_daemon/beastie.fig
/usr/X11R6/lib/X11/xdm/pixmaps/bsd.xpm
and applied the following patch to get transparent background:

  --- bsd.xpm.orig        Sun Nov 17 19:20:44 2002
  +++ bsd.xpm     Sun Nov 17 19:25:49 2002
  @@ -1,13 +1,12 @@
   /* XPM */
   static char *noname[] = {
   /* width height ncolors chars_per_pixel */
  -"212 231 7 1",
  +"212 231 6 1",
   /* colors */
   "  c #000000",
   ". c #00FFFF",
   "X c #D10000",
  -"o c #FFFFFF",
  +"o c none",
   "O c #00B000",
   "+ c #FFD700",
  -"@ c None",
   /* pixels */

I verified by gqview that the logo looked like I wanted it to be.

But when change the Xresoures file to contain line
xlogin*logoFileName: /usr/X11R6/lib/X11/xdm/pixmaps/bsd.xpm

and run xdm, it resets just after running X and it switches back to text console
and keeps switching between X and console forever giving me no other option than
to reset my machine (neither Ctrl-Alt-Backspace nor Ctrl-C works).

When I change the first line of my xpm file back to "212 231 7 1", everything
works as expected (even with the transparent background).

I would expect xdm to exit with an error message in case of invalid xpm file
instead of looping forever.

Output of 'xdm -debug 2 > xdm.log 2>&1' can be found at
http://openbsd.cz/~vasek/xdm.log
the xpm bitmap at http://openbsd.cz/~vasek/bsd.xpm
and X.org log at http://openbsd.cz/~vasek/Xorg.0.log

I consider the following line to be indication of the problem:

X Error of failed request:  BadDrawable (invalid Pixmap or Window parameter)
  Major opcode of failed request:  14 (X_GetGeometry)
  Resource id in failed request:  0x0
  Serial number of failed request:  51
  Current serial number in output stream:  51
Manager wait returns pid: 540 sig 0 core 0 code 1
Display exited with REMANAGE_DISPLAY

I hope this description is informative enough to help you find out the problem.