1. converted a bmp to png and saved it as a png.
I've never tried converting BMP to PNG because BMP's aren't capable of alpha transparency.
no option seen dealing with transparency.
You need to create the image with transparency from the beginning.
2. imported the png into skinstudio, when saved it was converted into a bmp not a tga.
Yeah, if there's no alpha transparency in the image, SkinStudio will convert the image to BMP.
I'll try to dig up some PSP7 tutorials, and post the links later.