The first thing to remember when creating a transparent GIF is that it works best on Web pages with a single color background. The image also needs to be a paletted image (256 colors).

If your Web page background uses multiple colors, choose the most common color of the Web page background for the background color of the image. After you have created your image and given it a solid single color background, follow these easy steps with Paint Shop Pro 5:

Select the Eyedropper Tool from the Toolbar and right click on the color in the image you want to make transparent.

Go to the Colors Menu and select Set Palette Transparency.  Choose the Set the transparency value to the current background color option.

You can either use the Proof button to see the transparency in action, or you can can go to the Colors menu and choose View Palette Transparency to toggle on the Transparent view. (The Transparency will be apparent by the background color turning to a checkered pattern.) Click OK to close the Palette Transparency Options.

 PSP has two transparency modes, and the operations don't mix.  You've
got to understand the differences, and how they operate to get them to do what you want.

The Native mode of transparency is for the high color images and only works in 16.7 million color mode. The primary use of transparency here is to create images from transparent Layers. Each layer can be imagined as a totally transparent plane upon which one paints.  Erasing from the layer makes it go transparent. (not true for the
Background layer.)

In GIF Mode, or 256 color mode, you don't really have transparency. What you do have is the ability to make one color transparent. The
primary use of this type of image is to place transparent images on top of other images on web sites.

It's pretty easy to create a transparent background in Native mode, but if you want a transparent background for a web image, you must convert from the Native mode to GIF. Do this by going to Colors-Decrease Color Depth and selecting 256 colors. That nice transparent background you had is going to become white, but you can flood fill it
with a color from the 256 color palette and make that color the transparent one in the GIF image.

Since it's a limited palette (256 colors just doesn't go very far when you start painting items, especially if you'd like to blend edges and anti-alias.) you'll need to pay attention to how you're painting the image. Usually, this means that you won't have the smooth edges you'd like. Also, since only one color may be transparent, and I do mean ONE color, gradients, such as drop shadows that go from black to white, with the white made transparent, will still show all of the shades of gray up to white. This is a common mistake because the artist believes the white component of the grays will be transparent.
It doesn't work that way, the grays stay solid because each is a separate color.

How to get the transparency? First, check the colors to make certain you have 256 colors! Lower if required.  Now, as you've been
creating the image, you've been using an unusual color to be transparent. Cyan, perhaps. Now you want to make it transparent.

A big caution at this point! If you only have a couple of colors in your palette, there may not be enough colors to create the
transparency checkerboard. Make certain you have at least the 'Safety Palette' loaded. I've never understood why PSP takes the colors for
the checkerboard from the active palette, but that's the way it is, and we've got to work with it.  Menu> Colors> Set Palette Transparency.

You now have 3 ways to select what color will be transparent.
1. None. (no transparency)
2. Set the transparency to the background color. (from the two color boxes on the middle right side of you screen, the top color box is the primary, the one underneath is the background color.)

3. Index color. (the number of the color in the palette. There's a shortcut for this option. Just move the cursor into your picture and click on the color you want to be transparent.) Click on "OK"

Now, you've set the transparent color, but still won't see it until you click on Menu> Colors> View Palette Transparency.  This line has a check mark to indicate it's on.  At this point, you should be able to see the transparent effect.

For PSP5, when you save, be sure to open the Save Options box and make certain V89a mode is checked, since that's the only GIF mode that
saves transparency. PSP6 doesn't give you this option.

When you load a GIF with transparency, you've got to have the Colors> View Palette Transparency checked in order to see the effect.

One last thing to be wary of- If you save your GIF's manually there are TWO GIF formats in the PSP save list.
CompuServe GIF *(*.gif)
CompuServe Graphics Interchange (*.gif)

Although both save as GIF formats, only the last one (Graphics Interchange) will save as transparent. If you're not paying attention, it may seem a random transparent save.
-Ron