i had problems with the example by sandhawk at spies dot com because my png overlay, and the jpeg canvas were using different color depths, so, this function corrects this:

[code]
function WatermarkImage($CanvasImage, $WatermarkImage /* MUST BE PHG */, $Opacity=10, $Quality=75)
{
    // create true color canvas image:
    $canvas_src = imagecreatefromjpeg($CanvasImage);
    $canvas_w = ImageSX($canvas_src);
    $canvas_h = ImageSY($canvas_src);
    $canvas_img = imagecreatetruecolor($canvas_w, $canvas_h);
    imagecopy($canvas_img, $canvas_src, 0,0,0,0, $canvas_w, $canvas_h);
    imagedestroy($canvas_src);    // no longer needed

    // create true color overlay image:
    $overlay_src = imagecreatefrompng($WatermarkImage);
    $overlay_w = ImageSX($overlay_src);
    $overlay_h = ImageSY($overlay_src);
    $overlay_img = imagecreatetruecolor($overlay_w, $overlay_h);
    imagecopy($overlay_img, $overlay_src, 0,0,0,0, $overlay_w, $overlay_h);
    imagedestroy($overlay_src);    // no longer needed

    // setup transparent color (pick one):
    $black   = imagecolorallocate($overlay_img, 0x00, 0x00, 0x00);
    $white   = imagecolorallocate($overlay_img, 0xFF, 0xFF, 0xFF);
    $magenta = imagecolorallocate($overlay_img, 0xFF, 0x00, 0xFF);    
    // and use it here:
    imagecolortransparent($overlay_img, $white);

    // copy and merge the overlay image and the canvas image:
    imagecopymerge($canvas_img, $overlay_img, 0,0,0,0, $overlay_w, $overlay_h, $Opacity);

    // output:
    header("Content-type: image/jpeg");
    imagejpeg($canvas_img, '', $Quality);

    imagedestroy($overlay_img);
    imagedestroy($canvas_img);
}

// call function with opcity set to 50% and 95% quality
WatermarkImage("canvas.jpg", "overlay.png", 50, 95);

[/code]