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Okay :)
1. It looks good :thumbsup:
2. It should be in 8-bit format (indexed 256 colours - actually 254 colours with 2 last indexes are for transparencies), now it's in 24-bit format (16.7 million colours): like this here!
3. Also you need a 32x32-size image
 
I suppose you mean "display 254-colours"?
Well, the same way you make the image in any number of colours from 2 to 256. Many image editing programs (for example infarview) can do this (something like "decrease colour depth"-option)
 
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