You have to make sure the color of the image itself is using the 8-bit color palette instead of 16bit. I'll fix that for you.
Edited Post: Check the attachments. I cleaned up the image, because the way the image was set, was laced with artifacts. Which made getting a transparent color hard without it sticking out. I had to manually remove all artifacts, so I could make sure the color would appear solid. Magenta or "Hot Pink" (R:240, G:000, B:255) is the preferred transparent color of choice, to make life a LOT easier on you. I used Gimp to clean it up, and then dropped that color in with Gimp. And GraphicsGale to get the color palette correct in 8bpp (256 Colors Mode).
Once I saw that it was like that, I put it back in Gimp to make it a pcx file. So the image is pcx ready, you just need to switch it over to that. One thing about .png images, whatever is used in the image itself, must never have any artifacts. When you go to remove solid colors, you'll see that there are often more of them, because 16bit colors often have at least 1 million shades color types total for a color index. Those individual shades are where the artifacts come from. 8bpp has only a 256 color index.
The image on the right, is what happens when you save the .png with the correct transparent color. So I made sure to include what I did in GraphicsGale to show that Magenta is the color being used. When you go to convert it, you'll notice that very color at the beginning of the palette.


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