I think that you need to set color depth to at least 16 bits per channel in PSP in order to work with transparencies. I always work at 24 bits, then reduce the color depth of the saved image to 256 colors using the free Bright utility.
If you can't select the 24-bit color depth option, it may be that your graphic card will not support it. Check your color quality settings in the control panel (Control Panel - Display - Settings) and see what's available on your machine.
You sure are catching on quick!
