Hiya kotd.
i can see two possible reason for the problem.
the first being the image is RGB colour, you need to convert it to 'indexed' colour (256) then set it to use the pallette included for gigas (pal.act) -
if your using photoshop:
image -> mode -> indexed -> custom, then select the pal.act
also the sprite file size has to be identical to that given in the blank demo template, so even if you've just created one sprite graphic, you must have lots of blank ones underneath so its the same size. or just paste that one you've made onto the top of the blank one.
hope that makes some sense