PSP12 Have forgotten how to do a transparent image

[badger50]

I have 2 gif images. On image2 I have erased the background so as all you see is the checkerboerd.
I want to place image2 (the visible part) on to image1.

I'm sure I have done all the correct procedures but the #2 image will show either a black or white background
when pasted on to image 1.

These are the rules I followed. What am I doing wrong?

To make one image color transparent
1. Choose Image Palette Set Palette Transparency.
If you are prompted to reduce the color depth and number of layers, click Yes to continue and then choose the options for decreasing color depth.
2. On the Set Palette Transparency dialog box, choose one of the following options:
• Set the transparency value to the current background color — makes the background color transparent
• Set the transparency value to a palette entry — specifies a color to be transparent. Click the color in the image, or click the color box to select from the current color picker.
If you want to view the transparency, click Proof.
3. Click OK.
The color is now transparent; however, it may still be displayed until you hide it.

[teknisyan]

You may want to check the selected background color on the materials palette and make sure that transparent is selected. Aside from that I think you are doing all the correct steps.