Help with Mugen Fonts

[Ryo Hazaki]

Hello all. I've created my own text in Photoshop to use in place of the MvC2 announcer words (what is the proper term for these anway?)
However, in game they show up as discolored and have a purple border around them. (notice just below the Sentinel's head in the 2nd and 3rd shots) Also, please notice the life portraits as I'm unable to correct them as well.



I'm new to Photoshop but willing to learn how to correct this. (Credits to mazemerald for screen pack, Arkady and the AvX team) Any help appreciated 

[Spidermew]

[Ryo Hazaki]

Thank you for your response. I followed the guide; however I was unable to finish it as i was unable to complete the action 3:00 mark of your video. I'll keep trying to see what works. Again thank you for response  

[Sinister1ne]

Palettes were so hard for me at first. I thought the spidermew video was great. But, I realized you missed somethings. Try this... start at 6:00 min. for what you want to do.

[Ryo Hazaki]

  I was informed to make sure the new font sprites are 256 colors only and that the palette index color is the transparency color. For reference, I've Photoshop and GIMP.  Where can I find these settings and also, do I save the text as a .pcx, palette, png or another format?