This happened yesterday in the DBPro forum. Let's see if it is the same thing.
Alpha transparency is not the same thing as image transparency. Image transparency is only a single color key, like Lilith said.
Images with alpha channels use a separate channel for the alpha. PNG and TGA are the best for this, but MSPaint does not save an alpha channel, just the RGB.
You need a paint program that uses an alpha channel for that to work.
If you don't have such a program, you can post the image and I can fix it for you.
This image uses the red channel as the source for the alpha, so it really doesn't show a great use of alpha...but, your program should be able to set the transparency of the flag using alpha: