Did you remember to chmod +x your new /sbin/init? It soulds like thats the problem.

If you want to add somethign to the startup, going the route of boot->your init->init.empeg tends to work best. But if you want to add stuff to have run after the player (like a menu if you quit the player), then things get a bit trickier, and you need to ensure you do all the steps the init.empeg does. Check the init that comes with Displayserver, or Smu's Stupid FTP for ideas here.