Okay, I got it to work but now I am left with another problem. I'll get to that shortly.
In order to get it to work, I had to do the following
1. Crop the image in GIMP
2. Resize the cropped image to a multiple of 4.
3. Export to DDS using GIMP, not GAT.
I now have an Atlas file with 1 icon in it. So it's far left and index of 0.
Here is the problem I am left with.
Without GAT to index the icons, if I want to create a file of say, 10 runes, I have to make sure that each one is precisely the height and width it needs to be plus the precise distance away from the icon to the right and below it in order for LoG to display each icon properly.
Doing this by eyesight is a tedious process at best. There has to be some kind of icon template that I can get from somewhere that has a built in map so that I will know exactly where to place each icon. Then this process becomes a matter of simply creating the images needed and not a battle with software and layouts.
Sorry, but I've been using graphics software since Paint 1.0 and have never had the headaches that I am having with this thing.
Anyway, if you know of some utility, besides GAT, that can help me with aligning icons, that would help an awful lot.
In the meantime, I no longer need help with actually creating the icons so that they will load without causing the uncompressed error. I just need a utility that will make working with multiple icons a little easier.
Thanks.