Each Windows XP icon should contain these three color depths to support different monitor display settings:
24-bit with 8-bit alpha (32-bit)
8-bit (256 colors) with 1-bit transparency
4-bit (16 colors) with 1-bit transparency
I tried using the 24 bit setting, but it didn't get picked up in Vegas.
The Help files say 16x16 pixels 32 bit .png with transparency
edit - well I managed to do one in Windows Paint which Vegas has picked up!
It's only two lines of text though - I wonder how Ultimatte S, Excalibur and others manage to fit sophisticated logos into 16 x 16 ?
If you can't get it done with PSP, try Image Magick, a suite of tools that will do almost anything with/to images that you can imagine. I believe the -alpha flag can add an alpha channel to an image that doesn't have it.
I also use Paint Shop Pro and had the same issue. I got it to work by adding one spot of transparency in the image which FORCED it to add the transparency layer. They all work fine after adding a dot of transparency.
OK, I can see that the choices on the download page can be confusing. I took the opportunity to upgrade my installation of ImageMagick which was two and a half years old. For my WinXP 32-bit machine I downloaded "ImageMagick-6.4.5-4-Q16-windows-dll.exe" which I preferred over the statically linked version. If you have a 64-bit machine you'll have to download "ImageMagick-6.4.5-4-Q16-windows-x64-static.exe" Then run the downloaded executable to install it.
Open a command window (Start menu > Run > cmd) and run the convert command, taking care that the full path to the command convert is specified (there is a Windows OS command named convert also):
The second command, identify, will give you the image details after the conversion which should indicate that the alpha channel has been turned on, and set to be transparent. There are other options too, the help pages document them all.
Hope that helps. ImageMagick is a very versatile set of tools; good to have in your toolset.