It can be a bit tricky to create png files.  We use the latest Photoshop but you might need to experiment with your settings.  You can test it by viewing the image file itself directly in your web browser, and test it even better by changing the page background so you can view the transparency properties with the browser.

I just encountered an issue with the script I am using, which is the shorter one earlier in this thread --- NOT sleight.js.  I'm using pngfix.js.  (source:  http://homepage.ntlworld.com/bobosola/ ).  The problem I encountered was that the images, all fairly small to medium-sized, were being distorted slightly.  It was as if they were being stretched vertically a few pixels.  The fix was to change the sizingMethod from scale to image.  I found the fix here:  http://homepage.ntlworld.com/bobosola/pnginfo.htm  It has a drawback in that it may not render the image as well if there is a styled edge.  Fortunately, none of the ones I'm using in this instance have styled edges.

I found some additional scripts and great information at these pages:

http://www.alistapart.com/articles/pngopacity/

http://www.daltonlp.com/daltonlp.cgi?item_type=1&item_id=217

http://youngpup.net/2001/sleight

I also experimented with the sleight javascript which mikeh posted.  He attributed it to Nokiko, which I don't think is accurate; kudos to Nokiko for posting it but I believe it was originally written by someone else.  I'm not certain though of the source.  In any case, one thing I didn't like about sleight is the necessity to hard-code a URL for the transparent gif used by the script.  However I've still got some more work to do on this particular site, including some more compatibility testing, and I might end up taking a closer look at sleight; actually at a variant of sleight which works with background images.  It is available here:

http://allinthehead.com/retro/69/sleight-of-hand#c000996