Michael, off topic slightly but I just wanted to say thanks! Finding this and your wonderful explaination has helped me out of a sticky situation. I had 3 part stretching PNGs w/ partial transparency between my forums and I was horrified when I learned that older browsers could see the ugly grey area. Understanding this stuff enabled me to re-export the images as PNG8 using Paint Shop Pro 9.
Just in case it may help someone else down the line - export > PNG Optimizer > Palette based w/ Optimized Octree > set transparency. It works a treat - the drop shadows went a little wierd but it works with the styling I have used. Thanks again! :up: