System Information
Windows 7, GTX 650

Blender Version
Broken: All 2.70 versions...
Worked: 2.60 versions it seems

Short description of error
Objects replaced from one mesh to another only replace mesh data and not material data. :(

Exact steps for others to reproduce the error
Create a "Monkey" (or whatever you like) and create a new material for that model. Now, make a new model and give it a new material of a different color. Now program one model to be replaced by the other. You'll see that the model changes but, the material does not. (In some cases the mesh will have no color data at all.) I've created a simple example file for you to test it out for yourself. :)

Test File