i used to make transparent gif's a long time age. i would download the free 30 day trial of Paint Shop Pro to do it. there is/was a free program that did the same(just the transparent background). try a google search. perhaps i misunderstood, you want to see the desktop as the background?
@Darryl: Thanks for the tip.
@Nitin: Thanks for trying it out.
The problem turned out to be my image, as I saved it in MSPaint and the transparency was lost. The only program that seemed to recognise the transparency in the image is the Windows XP preview bar, so I was sort of misled into thinking transparency was there.
I downloaded Paint.NET (free) and used that to make the image transparent. It's working now. Thanks everyone for your input.