Transparent Textures...

Okay, so I'm pissed because I can't figure out what's wrong with my texture, why it won't go transparent in the blue section. I painted an S in black with no antialiasing and set the background to 0 0 255 (pure blue). I even repainted the background in Wally to 0 0 255 blue. The texture flag is set to {. I have the brush bound to a func_illusionary with 255 and Solid. I simply cannot figure out what the hell is causing it to not be transparent!

Here's a link to the picture in .bmp format:

http://tenub.xmshosting.net/{pop_s.bmp

I think you have to give the texture a {function in wally. I dont know how.