Thanks for your reply!
I am just starting with Godot and didn't know about shaders in Godot so I think I now have my work cut out for me with the links you provided. Though, both links (at the moment) are the same? Thankfully I am familiar with C.
I'm not aware of *.tex files so I think I need to investigate that as well. Can the tex file be used to manipulate the the format of the image? For example, can I take a high-res image and make it 8 colors and indexed, for example?
I'm experimenting with using only FOSS tools for creating my game. I wasn't aware that PNG had any issues with free software/ patents.
Thanks for your info -- Threw a lot of homework on my lap ^_^"
==== UPDATE 1
So, I created this script and its not working. I am still researching. Im about to turn in for the night (im in asia), but I thought I would post my non-working shader in case you had anything to add/say.
// specify the color to be transparent which is r255, g0, b255 or what I like to call hot pink
color alpha_color = vec4(1.0, 0.0, 1.0, 1.0);
color texscreen sample_pixel = vec2(0, 0);
// if the pixel matches hotpink, make it transparent
if(sample_pixel == alpha_color)
COLOR.a = 0.0;