Well what art program are you using?
Because you have to make sure to convert the color to 256.
this shows you how to do it if your using paint shop
http://www.infinitymugenteam.com/Forum_345/index.php?topic=1060.0But if you dont have paint shop, make sure you convert your image to 256 colors (8bit)
Make sure you use a background color that dosnt appear anywere else in the images.
Open fighter factroy and go stright for the pal editor.
Open up an image that uses all of the colors your going to use(otherwize youll have to open more then one image and do this part over and over)
Now click the background part of the image and it should choose the color below.
Now click the bottom right box on the left hand side were there is nothing.
Then click the image that shows a box with an arrow pointing to it [] <==
This will transfer the color to the bottom and make that color transparent.
Now all the rest of your colors need to be transferd over (just make sure not to transfer the background color twice)
Then save the pal file, and then do the pal image convert trick shown in the video.