diff --git a/lib/filestorage/file_storage.php b/lib/filestorage/file_storage.php
index c832f619057..5009073eae7 100644
--- a/lib/filestorage/file_storage.php
+++ b/lib/filestorage/file_storage.php
@@ -1521,7 +1521,6 @@ class file_storage {
 
         $width    = $imageinfo['width'];
         $height   = $imageinfo['height'];
-        $mimetype = $imageinfo['mimetype'];
 
         if ($keepaspectratio) {
             if (0 >= $newwidth and 0 >= $newheight) {
@@ -1553,15 +1552,53 @@ class file_storage {
             }
         }
 
+        // The original image.
         $img = imagecreatefromstring($file->get_content());
+
+        // A new true color image where we will copy our original image.
+        $newimg = imagecreatetruecolor($newwidth, $newheight);
+
+        // Determine if the file supports transparency.
+        $hasalpha = $filerecord['mimetype'] == 'image/png' || $filerecord['mimetype'] == 'image/gif';
+
+        // Maintain transparency.
+        if ($hasalpha) {
+            imagealphablending($newimg, true);
+
+            // Get the current transparent index for the original image.
+            $colour = imagecolortransparent($img);
+            if ($colour == -1) {
+                // Set a transparent colour index if there's none.
+                $colour = imagecolorallocatealpha($newimg, 255, 255, 255, 127);
+                // Save full alpha channel.
+                imagesavealpha($newimg, true);
+            }
+            imagecolortransparent($newimg, $colour);
+            imagefill($newimg, 0, 0, $colour);
+        }
+
+        // Process the image to be output.
         if ($height != $newheight or $width != $newwidth) {
-            $newimg = imagecreatetruecolor($newwidth, $newheight);
-            if (!imagecopyresized($newimg, $img, 0, 0, 0, 0, $newwidth, $newheight, $width, $height)) {
+            // Resample if the dimensions differ from the original.
+            if (!imagecopyresampled($newimg, $img, 0, 0, 0, 0, $newwidth, $newheight, $width, $height)) {
                 // weird
                 throw new file_exception('storedfileproblem', 'Can not resize image');
             }
             imagedestroy($img);
             $img = $newimg;
+
+        } else if ($hasalpha) {
+            // Just copy to the new image with the alpha channel.
+            if (!imagecopy($newimg, $img, 0, 0, 0, 0, $width, $height)) {
+                // Weird.
+                throw new file_exception('storedfileproblem', 'Can not copy image');
+            }
+            imagedestroy($img);
+            $img = $newimg;
+
+        } else {
+            // No particular processing needed for the original image.
+            imagedestroy($newimg);
         }
 
         ob_start();
@@ -1580,6 +1617,11 @@ class file_storage {
 
             case 'image/png':
                 $quality = (int)$quality;
+
+                // Woah nelly! Because PNG quality is in the range 0 - 9 compared to JPEG quality,
+                // the latter of which can go to 100, we need to make sure that quality here is
+                // in a safe range or PHP WILL CRASH AND DIE. You have been warned.
+                $quality = $quality > 9 ? (int)(max(1.0, (float)$quality / 100.0) * 9.0) : $quality;
                 imagepng($img, NULL, $quality, NULL);
                 break;
 
diff --git a/lib/filestorage/tests/file_storage_test.php b/lib/filestorage/tests/file_storage_test.php
index 9c7ff1dfec7..95d60652187 100644
--- a/lib/filestorage/tests/file_storage_test.php
+++ b/lib/filestorage/tests/file_storage_test.php
@@ -986,6 +986,69 @@ class core_files_file_storage_testcase extends advanced_testcase {
         $this->assertInstanceOf('stored_file', $converted);
     }
 
+    public function test_convert_image_png() {
+        global $CFG;
+
+        $this->resetAfterTest(false);
+
+        $filepath = $CFG->dirroot.'/lib/filestorage/tests/fixtures/testimage.png';
+        $syscontext = context_system::instance();
+        $filerecord = array(
+            'contextid' => $syscontext->id,
+            'component' => 'core',
+            'filearea'  => 'unittest',
+            'itemid'    => 0,
+            'filepath'  => '/images/',
+            'filename'  => 'testimage.png',
+        );
+
+        $fs = get_file_storage();
+        $original = $fs->create_file_from_pathname($filerecord, $filepath);
+
+        // Vanilla test.
+        $filerecord['filename'] = 'testimage-converted-nosize.png';
+        $vanilla = $fs->convert_image($filerecord, $original);
+        $this->assertInstanceOf('stored_file', $vanilla);
+        // Assert that byte 25 has the ascii value 6 for PNG-24.
+        $this->assertTrue(ord(substr($vanilla->get_content(), 25, 1)) == 6);
+
+        // 10x10 resize test; also testing for a ridiculous quality setting, which
+        // we should if necessary scale to the 0 - 9 range.
+        $filerecord['filename'] = 'testimage-converted-10x10.png';
+        $converted = $fs->convert_image($filerecord, $original, 10, 10, true, 100);
+        $this->assertInstanceOf('stored_file', $converted);
+        // Assert that byte 25 has the ascii value 6 for PNG-24.
+        $this->assertTrue(ord(substr($converted->get_content(), 25, 1)) == 6);
+
+        // Transparency test.
+        $filerecord['filename'] = 'testimage-converted-102x31.png';
+        $converted = $fs->convert_image($filerecord, $original, 102, 31, true, 9);
+        $this->assertInstanceOf('stored_file', $converted);
+        // Assert that byte 25 has the ascii value 6 for PNG-24.
+        $this->assertTrue(ord(substr($converted->get_content(), 25, 1)) == 6);
+
+        $originalfile = imagecreatefromstring($original->get_content());
+        $convertedfile = imagecreatefromstring($converted->get_content());
+        $vanillafile = imagecreatefromstring($vanilla->get_content());
+
+        $originalcolors = imagecolorsforindex($originalfile, imagecolorat($originalfile, 0, 0));
+        $convertedcolors = imagecolorsforindex($convertedfile, imagecolorat($convertedfile, 0, 0));
+        $vanillacolors = imagecolorsforindex($vanillafile, imagecolorat($vanillafile, 0, 0));
+        $this->assertEquals(count($originalcolors), 4);
+        $this->assertEquals(count($convertedcolors), 4);
+        $this->assertEquals(count($vanillacolors), 4);
+        $this->assertEquals($originalcolors['red'], $convertedcolors['red']);
+        $this->assertEquals($originalcolors['green'], $convertedcolors['green']);
+        $this->assertEquals($originalcolors['blue'], $convertedcolors['blue']);
+        $this->assertEquals($originalcolors['alpha'], $convertedcolors['alpha']);
+        $this->assertEquals($originalcolors['red'], $vanillacolors['red']);
+        $this->assertEquals($originalcolors['green'], $vanillacolors['green']);
+        $this->assertEquals($originalcolors['blue'], $vanillacolors['blue']);
+        $this->assertEquals($originalcolors['alpha'], $vanillacolors['alpha']);
+        $this->assertEquals($originalcolors['alpha'], 127);
+
+    }
+
     private function generate_file_record() {
         $syscontext = context_system::instance();
         $filerecord = new stdClass();
diff --git a/lib/filestorage/tests/fixtures/testimage.png b/lib/filestorage/tests/fixtures/testimage.png
new file mode 100644
index 00000000000..791ad6e6c30
Binary files /dev/null and b/lib/filestorage/tests/fixtures/testimage.png differ