Paveethan -
I assume it's a still image.
My advice would be to edit the image separately before bringing it into PD... which is not a graphics editor.
I use Paint.net to put transparency into images. I find it gives finer control of tolerance levels - and therefore better control of the look of the final image in the PIP track. When the image is ready, save it as a png file and it will retain whatever transparency you assigned it. It's available (free) at
http://seemyworldonvideo.com/pages/extras-tools.html along with lots of other useful tools. All you have to do is join SMWOV... link below.
Cheers -
Tony
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