Sorry it took so long, my version of psp7 turned out to be a bit buggy...
I think my old instructions may have been for PSP 5 or 6, you're right about the background. It can easily be fixed though, simply make the background black again after the alpha channel creation... (One way to do it: create a new image, size 96x72, make it entirely black, Ctr-A, Ctrl-C, go back to old image, Ctrl-L, move layer to bottom, merge all layers) Then save as tiff and you should have a decent sprite.
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