Hello,
You are on the right track. Beside deleting/adding new work item types and queries, you would also have to update the workitems.xml file (in the WorkItem Tracking folder). You can export the work item definition (.xml files) using the witexport utility from your project and the queries directly from Team Explorer (just save them as .wiq files). You do not need the .diagram files in the template.
You should also change the Template Name (ProcessTemplate.xml) just to make sure there is no confusion later.
Once you have all these changes done, just upload them - it will create a new template with the new name.
Feel free to contact me offline (follow the link to my website below) if you need more assistance.
Thanks,
Alin,
PRAKTIK Consulting
TFS Hosting and TFS Consulting Services.