Well, it's all fixed up now and ready to turn into a transparent gif. Before you go to the next step, make sure you have reset your color boxes on the right of the PSP window if you have been changing them to do touch up. You want them to remain two colors NOT in the image or you will end up with things being transparent that you don't want to be. First let's double check your transparent settings from the General Preferences under File Menu. This is how I have mine set up.
Next: You either have two arrows on your top toolbar, or you go to the Colors Menu to Increase or Decrease colors. One arrow decreases to 256 colors, the other increases to 16 million colors. Use the decrease and the following box will pop up. These settings give the best results.
Click OK and the image is now a gif and you are ready to set the transparency. Look on the top tool bar for the icon that looks like two pieces of red and yellow paper.
To make sure the transparency is working, click proof before you say OK. You should see a grey and white checkerboard now instead of the green background. That means it is now transparent.
For earlier versions of PSP, you follow all of the steps except for using the Set Transparency. Instead, once you have reduced the jpg to a gif, go to the file menu. Go to Save As and choose gif. Then before saving go to options. Set the transparency value to the background and proof.
