I didn't do an edit of the sprite, I did a paintover of your drawing.

I think a lot of the problem stems from the lack of structure going on. I just picked one light source and did a quick shading pass over a trace of your line art (and I see I screwed up a couple of shadows, but meh...) In your painting and in your sprite you have some serious pillowshading going on. The edges of all the shapes get shaded and the center of the areas all get lighter and lighter.
This flattens out the whole thing, but more than that, it makes the actual structure of the object pretty hard to figure out. I just guessed at a lot of the upper structure, because I had a hard time reconciling the overall form of the head and the way the skull-mask thing attaches to it. The goal of this was basically to point out the pillowshading and hopefully show you why the sprite was hard to figure out.
I'd suggest getting the basic shape of the sprite down and figure out how to shade it, and then worry about the details like the veins and surface texture and stuff. The veins add a lot of noise to the shape right now, and they're not really placed in any sort of logical way, so they probably add to the confusion. You can tell what they are in the larger drawing, but in the sprite they could be veins or scars or a texture or some sort of indication of the sort of material it's supposed to be...
But I'm more a painting/drawing sort of person. I don't have a lot of pixelling experience, but the good thing about drawing is that you can translate the same basic skills into pixels. I think the one thing you can pull out of this particular critique is to work on your overall 2D drawing / painting stuff as well as your pixel stuff, because I think you could stand to learn a lot about form and shading.
// EDIT // Added a better version of the paintover. I forgot the bulge for some reason and it threw me off. Crit remains the same.
// Edit 2 //
http://img.photobucket.com/albums/v611/Squiggly_P/Paintovers/mcp_quick_shade2.png slightly cleaner / better shading, but it sorta strays from your concept a little I think, so I linked it instead...