I've just checked PHP's issue tracker and a core developer says that this function was never meant to support alpha channel! and they refused to commit the provided patch! so ridicules 
Anyway i tried rodrigo's workaround and it worked quite well, thanks rodrigo for sharing it.
I came up with another idea which is much faster than his solution, (it may need a little bit more memory)

Hope it helps someone.

<?php
/**
 * PNG ALPHA CHANNEL SUPPORT for imagecopymerge();
 * by Sina Salek
 *
 * Bugfix by Ralph Voigt (bug which causes it
 * to work only for $src_x = $src_y = 0. 
 * Also, inverting opacity is not necessary.)
 * 08-JAN-2011
 *
 **/
    function imagecopymerge_alpha($dst_im, $src_im, $dst_x, $dst_y, $src_x, $src_y, $src_w, $src_h, $pct){
        // creating a cut resource
        $cut = imagecreatetruecolor($src_w, $src_h);

        // copying relevant section from background to the cut resource
        imagecopy($cut, $dst_im, 0, 0, $dst_x, $dst_y, $src_w, $src_h);
        
        // copying relevant section from watermark to the cut resource
        imagecopy($cut, $src_im, 0, 0, $src_x, $src_y, $src_w, $src_h);
        
        // insert cut resource to destination image
        imagecopymerge($dst_im, $cut, $dst_x, $dst_y, 0, 0, $src_w, $src_h, $pct);
    } 

?>

imagecopymerge PHP function helped me to create a fast method that replaces one color by another in true color images.

Beforehand for this purpose I had to loop over all the pixels of an image and replace color pixel by pixel using imagecolorat and imagesetpixel; this method is really slow for large images.

So here is the fast one:

<?php

function replaceColorInImage ($image, $old_r, $old_g, $old_b, $new_r, $new_g, $new_b)
{
    imagecolortransparent ($image, imagecolorallocate ($image, $old_r, $old_g, $old_b));
    
    $w = imagesx ($image);
    $h = imagesy ($image);
    
    $resImage = imagecreatetruecolor ($w, $h);
    
    imagefill ($resImage, 0, 0, imagecolorallocate ($resImage, $new_r, $new_g, $new_b));
    
    imagecopymerge ($resImage, $image, 0, 0, 0, 0, $w, $h, 100);
    
    return $resImage;
}

?>

Building upon backglancer's and stefan's posts below, the following script will lay a 24-bit PNG watermark over any image.

To prepare a 24-bit watermark, I recommend creating a white logo or text over a transparent background in Photoshop.  Save this as a 24-bit PNG via 'Save for the Web...'.  Be sure to set the transparency of the logo layer in Photoshop itself.  30-40% is a good setting.

Once the assets are prepared, throw the full or relative server paths at the watermark function below:

/******************************************************************/

function watermark($sourcefile, $watermarkfile) {
  
    #
    # $sourcefile = Filename of the picture to be watermarked.
    # $watermarkfile = Filename of the 24-bit PNG watermark file.
    #
    
    //Get the resource ids of the pictures
    $watermarkfile_id = imagecreatefrompng($watermarkfile);
    
    imageAlphaBlending($watermarkfile_id, false);
    imageSaveAlpha($watermarkfile_id, true);

    $fileType = strtolower(substr($sourcefile, strlen($sourcefile)-3));

    switch($fileType) {
        case('gif'):
            $sourcefile_id = imagecreatefromgif($sourcefile);
            break;
            
        case('png'):
            $sourcefile_id = imagecreatefrompng($sourcefile);
            break;
            
        default:
            $sourcefile_id = imagecreatefromjpeg($sourcefile);
    }

    //Get the sizes of both pix   
  $sourcefile_width=imageSX($sourcefile_id);
  $sourcefile_height=imageSY($sourcefile_id);
  $watermarkfile_width=imageSX($watermarkfile_id);
  $watermarkfile_height=imageSY($watermarkfile_id);

    $dest_x = ( $sourcefile_width / 2 ) - ( $watermarkfile_width / 2 );
    $dest_y = ( $sourcefile_height / 2 ) - ( $watermarkfile_height / 2 );
    
    // if a gif, we have to upsample it to a truecolor image
    if($fileType == 'gif') {
        // create an empty truecolor container
        $tempimage = imagecreatetruecolor($sourcefile_width,
                                                                            $sourcefile_height);
        
        // copy the 8-bit gif into the truecolor image
        imagecopy($tempimage, $sourcefile_id, 0, 0, 0, 0, 
                            $sourcefile_width, $sourcefile_height);
        
        // copy the source_id int
        $sourcefile_id = $tempimage;
    }

    imagecopy($sourcefile_id, $watermarkfile_id, $dest_x, $dest_y, 0, 0,
                        $watermarkfile_width, $watermarkfile_height);

    //Create a jpeg out of the modified picture
    switch($fileType) {
    
        // remember we don't need gif any more, so we use only png or jpeg.
        // See the upsaple code immediately above to see how we handle gifs
        case('png'):
            header("Content-type: image/png");
            imagepng ($sourcefile_id);
            break;
            
        default:
            header("Content-type: image/jpg");
            imagejpeg ($sourcefile_id);
    }           
  
    imagedestroy($sourcefile_id);
    imagedestroy($watermarkfile_id);
    
}

The following function creates mask of a true color image for a given color. Beforehand for creating an image mask I used to loop over all image pixels and check their color using imagecolorat and copy if the color matches with imagesetpixel. This was very slow for large images, so the following code improves the process.

<?php

    function getOppositeColor ($color)
    {
        return (
                    ( (255 - ($color >> 16) & 0xFF) << 16 ) +
                    ( (255 - ($color >> 8  ) & 0xFF) << 8  ) +
                    ( (255 - ($color         ) & 0xFF)         )
                );
    }

    function createImageMask (&$image, $color)
    {
        $w = imagesx ($image);
        $h = imagesy ($image);
        
        $tmpImage = imagecreatetruecolor ($w, $h);

        imagecopy ($tmpImage, $image, 0, 0, 0, 0, $w, $h);

        imagefilter ($image, IMG_FILTER_NEGATE);

        imagecolortransparent ($image, getOppositeColor ($color));
        
        imagecopymerge ($tmpImage, $image, 0, 0, 0, 0, $w, $h, 50);

        imagedestroy ($image);
        
        $image = $tmpImage;        
    }

?>

So for example, if we have a photo and we specify color = (255, 0, 0), i.e. red, the result will be image of the same size with red pixels everywhere the original photo was red and grey pixels exerywhere else.

I was about to kill myself....
any one of you trying to merge a SEMI transparent png...
use imagecopy   :)
<?
$flag = imagecreatefrompng('flags/images/flagWhiteFill.png');
$mask = imagecreatefrompng('flags/images/flag_transparent.png');

imagealphablending($flag, 1);
imagealphablending($mask, 1);

imagecopy($flag, $mask, 0,0,0,0,25,43);

Header("Content-type: image/jpeg");
imagepng($flag);
?>

ImageSaveAlpha(resource, bool);   made the transparent color - not transparent... dunno why :)

<?php
/**
 * PNG ALPHA CHANNEL SUPPORT for imagecopymerge();
 * This is a function like imagecopymerge but it handle alpha channel well!!!
 **/

// A fix to get a function like imagecopymerge WITH ALPHA SUPPORT
// Main script by aiden dot mail at freemail dot hu 
// Transformed to imagecopymerge_alpha() by rodrigo dot polo at gmail dot com
function imagecopymerge_alpha($dst_im, $src_im, $dst_x, $dst_y, $src_x, $src_y, $src_w, $src_h, $pct){
    if(!isset($pct)){ 
        return false; 
    }
    $pct /= 100;
    // Get image width and height
    $w = imagesx( $src_im );
    $h = imagesy( $src_im );
    // Turn alpha blending off
    imagealphablending( $src_im, false );
    // Find the most opaque pixel in the image (the one with the smallest alpha value)
    $minalpha = 127;
    for( $x = 0; $x < $w; $x++ )
    for( $y = 0; $y < $h; $y++ ){
        $alpha = ( imagecolorat( $src_im, $x, $y ) >> 24 ) & 0xFF;
        if( $alpha < $minalpha ){ 
            $minalpha = $alpha; 
        }
    }
    //loop through image pixels and modify alpha for each
    for( $x = 0; $x < $w; $x++ ){
        for( $y = 0; $y < $h; $y++ ){
            //get current alpha value (represents the TANSPARENCY!)
            $colorxy = imagecolorat( $src_im, $x, $y );
            $alpha = ( $colorxy >> 24 ) & 0xFF;
            //calculate new alpha
            if( $minalpha !== 127 ){ 
                $alpha = 127 + 127 * $pct * ( $alpha - 127 ) / ( 127 - $minalpha ); 
            } else { 
                $alpha += 127 * $pct;
            }
            //get the color index with new alpha
            $alphacolorxy = imagecolorallocatealpha( $src_im, ( $colorxy >> 16 ) & 0xFF, ( $colorxy >> 8 ) & 0xFF, $colorxy & 0xFF, $alpha );
            //set pixel with the new color + opacity
            if( !imagesetpixel( $src_im, $x, $y, $alphacolorxy ) ){ 
                return false; 
            }
        }
    }
    // The image copy
    imagecopy($dst_im, $src_im, $dst_x, $dst_y, $src_x, $src_y, $src_w, $src_h);
}

// USAGE EXAMPLE:
$img_a = imagecreatefrompng('image1.png');
$img_b = imagecreatefrompng('wm2.png');

// SAME COMMANDS:
imagecopymerge_alpha($img_a, $img_b, 10, 10, 0, 0, imagesx($img_b), imagesy($img_b),50);

// OUTPUT IMAGE:
header("Content-Type: image/png");
imagesavealpha($img_a, true);
imagepng($img_a, NULL);
?>

Some highly amusing stuff: This code appears normal and is a way to cut out slices of an image randomly.

<?php
header("Content-Type: image/jpeg");
$width=837;
$height=771;
$origim = imagecreatefromjpeg("theimage.jpeg"); /* Attempt to open */
$imagetodisplay=imagecreate($width, $height);

for($i=0;$i<=100;$i++)
{
$xPos=rand(0,$width-9);
$yPos=rand(0,$height-9);
imagecopy($imagetodisplay, $origim, $xPos, $yPos , $xPos, $yPos , 10  , 10);
}

imagejpeg($imagetodisplay);
imagedestroy($imagetodisplay);
imagedestroy($origim);
?>

Try running this however and an omitted detail adds to the fun. Since the first colour that is defined is taken to be the background colour, we have a random colour selected from $origim as the background colour for $imagetodisplay, but this random colour is weighted according to the background image. It was a surprise (I thought the bg would be black) but I am now keeping it as it looks good.

This example shows how to use imageCopyMerge to create a water mark function with four random positions (the corners).

<?php
function waterMark($fileInHD, $wmFile, $transparency = 50, $jpegQuality = 90, $margin = 5) {

 $wmImg   = imageCreateFromGIF($wmFile);
 $jpegImg = imageCreateFromJPEG($fileInHD);

 // Water mark random position
 $wmX = (bool)rand(0,1) ? $margin : (imageSX($jpegImg) - imageSX($wmImg)) - $margin;
 $wmY = (bool)rand(0,1) ? $margin : (imageSY($jpegImg) - imageSY($wmImg)) - $margin;

 // Water mark process
 imageCopyMerge($jpegImg, $wmImg, $wmX, $wmY, 0, 0, imageSX($wmImg), imageSY($wmImg), $transparency);

 // Overwriting image
 ImageJPEG($jpegImg, $fileInHD, $jpegQuality);
}

waterMark('myImage.jpg','waterMark.gif');

?>

HTH.

Javier Tac?n.

This function is intended to serve as an example for the "imageCopyMerge"-function.
I hope it will help some of the less experienced php-coders here.
I wrote it to mark objects of a real estate broker as "sold" by copying the "sold"-picture right into the picture of the house.

<?php

//$sourcefile = Filename of the picture into that $insertfile will be inserted.
//$insertfile = Filename of the picture that is to be inserted into $sourcefile.
//$targetfile = Filename of the modified picture.
//$transition = Intensity of the transition (in percent)
//$pos          = Position where $insertfile will be inserted in $sourcefile
//                0 = middle
//                1 = top left
//                2 = top right
//                3 = bottom right
//                4 = bottom left
//                5 = top middle
//                6 = middle right
//                7 = bottom middle
//                8 = middle left
//
//
function mergePix($sourcefile,$insertfile, $targetfile, $pos=0,$transition=50)
{
    
//Get the resource id?s of the pictures
    $insertfile_id = imageCreateFromJPEG($insertfile);
    $sourcefile_id = imageCreateFromJPEG($sourcefile);

//Get the sizes of both pix    
    $sourcefile_width=imageSX($sourcefile_id);
    $sourcefile_height=imageSY($sourcefile_id);
    $insertfile_width=imageSX($insertfile_id);
    $insertfile_height=imageSY($insertfile_id);

//middle
    if( $pos == 0 )
    {
        $dest_x = ( $sourcefile_width / 2 ) - ( $insertfile_width / 2 );
        $dest_y = ( $sourcefile_height / 2 ) - ( $insertfile_height / 2 );
    }

//top left
    if( $pos == 1 )
    {
        $dest_x = 0;
        $dest_y = 0;
    }

//top right
    if( $pos == 2 )
    {
        $dest_x = $sourcefile_width - $insertfile_width;
        $dest_y = 0;
    }

//bottom right
    if( $pos == 3 )
    {
        $dest_x = $sourcefile_width - $insertfile_width;
        $dest_y = $sourcefile_height - $insertfile_height;
    }

//bottom left    
    if( $pos == 4 )
    {
        $dest_x = 0;
        $dest_y = $sourcefile_height - $insertfile_height;
    }

//top middle
    if( $pos == 5 )
    {
        $dest_x = ( ( $sourcefile_width - $insertfile_width ) / 2 );
        $dest_y = 0;
    }

//middle right
    if( $pos == 6 )
    {
        $dest_x = $sourcefile_width - $insertfile_width;
        $dest_y = ( $sourcefile_height / 2 ) - ( $insertfile_height / 2 );
    }
        
//bottom middle    
    if( $pos == 7 )
    {
        $dest_x = ( ( $sourcefile_width - $insertfile_width ) / 2 );
        $dest_y = $sourcefile_height - $insertfile_height;
    }

//middle left
    if( $pos == 8 )
    {
        $dest_x = 0;
        $dest_y = ( $sourcefile_height / 2 ) - ( $insertfile_height / 2 );
    }
    
//The main thing : merge the two pix    
    imageCopyMerge($sourcefile_id, $insertfile_id,$dest_x,$dest_y,0,0,$insertfile_width,$insertfile_height,$transition);

//Create a jpeg out of the modified picture
    imagejpeg ($sourcefile_id,"$targetfile");
    
}

This function is intended to serve as an example for the "imageCopyMerge"-"ImageCopyResized", "ImageColorTransparent" functions. 
I hope it will help. 
This function pick an image, square cut it resampled at the size requested and finishing merge the result with another one to obtain a circular image result. I have a problem to obtain an thumbnail that respect the colors and at the same time where cutted in a circular form, I hope this solution can gives you a clue to obtain a free form images, I use this one also to create multicutted images.

<?php
$generalsrc="$image"; //the image to resample, resize and iconaize
$final_thumbwidth ="125";
$final_thumbheight ="125";

$abc = imagecreatefromjpeg("$generalsrc"); 
$def = imagecreatetruecolor($final_thumbwidth, $final_thumbheight); 
$src_mx = round((imagesx($abc) / 2)-"0.1"); // middle x point of the image
$src_my = round((imagesy($abc) / 2)-"0.1"); // middle y point of the image
$src_x = ($src_mx * 2);
$src_y = ($src_my * 2);
$src_sq = ($src_x >= $src_y)?$src_y:$src_x; //used to define the best size for a square cut of the image
$pl = ($src_x >= $src_y)?"1":"2"; //define if the image is portait or landscape
$strt_pntx = ($pl=="1")?round(($src_my / 2)-"0. 1"):"0";  //defines the x start point
$strt_pnty = ($pl=="2")?round(($src_mx / 2)-"0. 1"):"0";  //defines the y start point

imagecopyresized($def, $abc, 0, 0, $strt_pntx, $strt_pnty, $final_thumbwidth, $final_thumbheight, $src_sq, $src_sq);

$overlay_img = imagecreatefromPNG("circle_125.png"); //NOTE use png for this
$src_w = "ImageSX($overlay_img)";
$src_h  = "ImageSY($overlay_img)";

$can_img = imagecreatetruecolor($src_w, $src_h);

$black = ImageColorAllocate ($overlay_img, 0, 0, 0);

ImageColorTransparent($overlay_img , $black);

imagecopy($can_img, $def, 0,0,0,0, $src_w, $src_h);
imagecopymerge($can_img, $overlay_img , 0,0,0,0, ImageSX($overlay_img), ImageSY($overlay_img),100); //Imagecopy won't work, you must used imagecopymerge

ImageJPEG($can_img,"merge_$generalsrc",100);

imagedestroy($overlay_img);
imagedestroy($can_img);
ImageDestroy($abc); 
ImageDestroy($def); 

print "<HTML><HEAD><TITLE>test</TITLE></HEAD><BODY>
original:<hr><img src=\"$generalsrc\" width=\"300\"><br><br><br>new:<hr><img src=\"merge_$generalsrc\">
<br>width = $src_x
<br>height = $src_y
<br>mdlw = $src_mx
<br>mdlh = $src_my
<br>sqr = $src_sq
<br>pl = $pl
<br>start point x = $strt_pntx
<br>start point y = $strt_pnty
</BODY></HTML>";
?>

Task: Rotate a large image, then reduce it in size and place it on a small background (i.e. as an Inset).

Problem: If you resize the image first, the rotation becomes hugely aliased...  So, it makes sense to rotate it first, then shrink it.
Unfortunately, when you resample the image, you lose the background color (at least, some of it may change), so you can no longer set transparancy as you require.  If instead you resize the image (rather than resample), again, the aliasing looks bad.

Solution:  Resize the background - make it bigger.  Then add the original (large) inset, and resize the whole thing back to normal.

<?php
/* We will shrink the inset to 25% */
$resizePercentage = 0.25;

/* Load a source image and a background */
$iSource = ImageCreateFromJpeg($source_file);
$iBackground = ImageCreateFromJpeg($background_file);

/* Do something here, such a rotate, skew etc */
...
/* Assume $iSource is still the image we want to insert onto the background */

/* Set the background color to be transparent */
$cBackground = ImageColorClosest($iSource, 255, 0, 255);
ImageColorTransparent($iSource, $cBackground);

/* Resize the background - make it huge */
$iBackground = ImageResize($iTemplate, ImageSX($iBackground ) / $resizePercentage, ImageSY($iBackground ) / $resizePercentage);
/* Place the image on the background - all full size, so no aliasing issues */
ImageCopyMerge($iBackground , $iSource, 
    ((ImageSX($iBackground ) - ImageSX($iSource)) / 2), 
    ((ImageSY($iBackground ) - ImageSY($iSource)) / 2) - 25, 0, 0, ImageSX($iWorking), ImageSY($iSource), 100);
/* Shrink the combined image... no issues with transparancy! */
$iBackground = ImageResize($iTemplate, ImageSX($iBackground ) * $resizePercentage, ImageSY($iBackground ) * $resizePercentage);

/* Output the image as a PNG */
header("Content-Type: image/png");
ImagePng($iBackground);
exit();

function ImageResize($pImage, $t_width, $t_height) {
  // Target image
  $iCanvas = @ImageCreateTrueColor($t_width, $t_height);
  // Source dimensions
  $s_width = ImageSX($pImage);
  $s_height = ImageSY($pImage);
  // Copy image
  ImageCopyResampled($iCanvas, $pImage, 0, 0, 0, 0, $t_width, $t_height, $s_width, $s_height);
  // Return image
  return $iCanvas;
}
?>

If you need to merge 2 png's (or  presumably 2 gifs) with different color palettes, I have found this is the function to use.  Just set pct to 99, and you are rocking.  With pct set to 100, or imagecopy for that matter, the palette seems to go wonky.  (It probably just uses the palette of the source image. but don't quote me on that).

I needed to draw a "pointer" image over a map, but had some problems with png image transparency.
So I created a png image with white background (not transparent) and merged it on my map, after defining white color as transparent:

<?php

$src_file = 'source.jpg';
list($src_w, $src_h, $src_t, $src_a) = getimagesize($src_file);

$ptr_file = 'pointer.png'; // must have no transparency, but white background
list($ptr_w, $ptr_h, $ptr_t, $ptr_a) = getimagesize($ptr_file);

// destination image dimensions:
$dst_w = 400;
$dst_h = 200;

// pointer position:
$ptr_x = 195;
$ptr_y = 70;

$srcImage = imageCreateFromJpeg($src_file) or die ('failed imageCreateFromJpg'); 
$dstImage = imageCreateTrueColor($dst_w, $dst_h) or die ('failed imageCreateTrueColor'); 

imageCopyResampled($dstImage, $srcImage, 0, 0, 0, 0, $dst_w, $dst_h, $src_w, $src_h) or die ('failed imageCopyResampled'); 

$ptrImage = imageCreateFromPng($ptr_file) or die ('failed imageCreateFromPng'); 

$ptr_white = imageColorAllocate($ptrImage,255,255,255);
imageColorTransparent($ptrImage,$ptr_white);

imageCopyMerge($dstImage, $ptrImage, $ptr_x, $ptr_y, 0, 0, $ptr_w, $ptr_h, 100) or die ('failed imageCopyMerge');

imageJpeg($dstImage,'',100) or die ('failed imageJpeg');

imageDestroy($srcImage) or die ('failed imageDestroy(1)');
imageDestroy($dstImage) or die ('failed imageDestroy(2)');
imageDestroy($ptrImage) or die ('failed imageDestroy(3)');

?>

Check your header... He is false... 

<?php
header("Content-Type: image/png");
?>

This is what I use for merging two images while respecting the alpha channel (formulas are taken from the wikipedia article on alpha compositing; they're not too pretty as I didn't really try to make them look so, but instead just work and make sense when checked out months from now), with a quirk - an additional parameter (that defaults to NULL to be ignored) to manually specify a "transparent" color, which won't be copied over from the source to the destination. In comparison to the other implementation here, only one pass over $src_im is done, but more calculations are performed:

<?php
function imagecopymerge_alpha($dst_im, $src_im, $dst_x, $dst_y, $src_x, $src_y, $src_w, $src_h, $pct, $trans = NULL)
{
  $dst_w = imagesx($dst_im);
  $dst_h = imagesy($dst_im);

  // bounds checking
  $src_x = max($src_x, 0);
  $src_y = max($src_y, 0);
  $dst_x = max($dst_x, 0);
  $dst_y = max($dst_y, 0);
  if ($dst_x + $src_w > $dst_w)
    $src_w = $dst_w - $dst_x;
  if ($dst_y + $src_h > $dst_h)
    $src_h = $dst_h - $dst_y;

  for($x_offset = 0; $x_offset < $src_w; $x_offset++)
    for($y_offset = 0; $y_offset < $src_h; $y_offset++)
    {
      // get source & dest color
      $srccolor = imagecolorsforindex($src_im, imagecolorat($src_im, $src_x + $x_offset, $src_y + $y_offset));
      $dstcolor = imagecolorsforindex($dst_im, imagecolorat($dst_im, $dst_x + $x_offset, $dst_y + $y_offset));

      // apply transparency
      if (is_null($trans) || ($srccolor !== $trans))
      {
        $src_a = $srccolor['alpha'] * $pct / 100;
        // blend
        $src_a = 127 - $src_a;
        $dst_a = 127 - $dstcolor['alpha'];
        $dst_r = ($srccolor['red'] * $src_a + $dstcolor['red'] * $dst_a * (127 - $src_a) / 127) / 127;
        $dst_g = ($srccolor['green'] * $src_a + $dstcolor['green'] * $dst_a * (127 - $src_a) / 127) / 127;
        $dst_b = ($srccolor['blue'] * $src_a + $dstcolor['blue'] * $dst_a * (127 - $src_a) / 127) / 127;
        $dst_a = 127 - ($src_a + $dst_a * (127 - $src_a) / 127);
        $color = imagecolorallocatealpha($dst_im, $dst_r, $dst_g, $dst_b, $dst_a);
        // paint
        if (!imagesetpixel($dst_im, $dst_x + $x_offset, $dst_y + $y_offset, $color))
          return false;
        imagecolordeallocate($dst_im, $color);
      }
    }
  return true;
}

// use it like this (identical to imagecopymerge)
function imagecopymerge_alpha($dst_im, $src_im, $dst_x, $dst_y, $src_x, $src_y, $src_w, $src_h, $pct)
// or this
function imagecopymerge_alpha($dst_im, $src_im, $dst_x, $dst_y, $src_x, $src_y, $src_w, $src_h, $pct, array('red' => 1, 'green' => 2, 'blue' => 3, 'alpha' =>4))
?>

Add logo on image script.
<?php
/**
 * Put logo on low right jpeg image
 * used stefan's script for position
 **/
$logo_file = "logo.png"; 
$image_file = "img.jpg"; 
$targetfile = "img2.jpg";
$photo = imagecreatefromjpeg($image_file);
$fotoW = imagesx($photo);
$fotoH = imagesy($photo);
$logoImage = imagecreatefrompng($logo_file);
$logoW = imagesx($logoImage); 
$logoH = imagesy($logoImage); 
$photoFrame = imagecreatetruecolor($fotoW,$fotoH);
$dest_x = $fotoW - $logoW;
$dest_y = $fotoH - $logoH;
imagecopyresampled($photoFrame, $photo, 0, 0, 0, 0, $fotoW, $fotoH, $fotoW, $fotoH);
imagecopy($photoFrame, $logoImage, $dest_x, $dest_y, 0, 0, $logoW, $logoH);
imagejpeg($photoFrame, $targetfile);  
echo '<img src="'.$targetfile.'" />';
?>

in addition to stefan's posting:

i found that if you use imagecopymerge with png-24 files with an alpha channel, it doesn't work use imagecopy instead.
it seems that imagecopymerge doesn't respect the alpha channel the way it should (a bug??).

some sample code here to place an image (image.png) on a backgroundcolor or backgroundimage.

<?php

$im = "image.png";
$bg = "ffddee";     // hex representation of the color (i.e. #ffffff for white)
$out = "png";       // or "jpg" for jpg file output
// $backgroundfile = "";  // optional backgroundfile if you don't want to use a color

//
// function to convert hex colorcode to decimal
//

function colordecode($hex){

   $code[r] = hexdec(substr($hex, 0 ,2));
   $code[g] = hexdec(substr($hex, 2 ,2));
   $code[b] = hexdec(substr($hex, 4 ,2));

   return $code;

} // end func colordecode

// create the resource id
$image_id = imageCreateFromPNG($im);

// get image size
$im_X = ImageSX($image_id);
$im_Y = ImageSY($image_id);

// create a truecolor background image of the right size
// or use a background image like this
// $backgroundimage = imageCreateFromPNG($backgroundfile);
$backgroundimage = imagecreatetruecolor($im_X, $im_Y);

// get the desired backgroundcolor:
// don't use this if you want to use a background image
$code = colordecode($bg);
$backgroundcolor = ImageColorAllocate($backgroundimage, $code[r], $code[g], $code[b]);
ImageFilledRectangle($backgroundimage, 0, 0, $im_X, $im_Y, $backgroundcolor);

// merge the two together with alphablending on!
ImageAlphaBlending($backgroundimage, true);
imagecopy($backgroundimage, $image_id, 0, 0, 0, 0, $im_X, $im_Y);

// output the image:
if($output == "jpg"){
   Header( "Content-type: image/jpeg");
   ImageJPEG($backgroundimage);
   }
   else{
       Header( "Content-type: image/png");
       ImagePNG($backgroundimage);
       }

// destroy the memory
ImageDestroy($backgroundimage);
ImageDestroy($image_id);
?>

A few corrections to the code supplied by nick at prient:

$iTemplate should be $iBackground
$iWorking should be $iSource

After fixing those two I found the script really useful, thanks!

First you need make 0~9 gif format images and background image.

<?php
/*
make random image number check
20050524 by ascent WebAQ.com
*/

$rands = rand(1000,9999);

session_start();
$_SESSION['random_image_number_check'] = $rands;

$bg = './random_image_bg.jpg';
$numimgp = './random_image_number_%d.gif';

$numimg1 = sprintf($numimgp,substr($rands,0,1));
$numimg2 = sprintf($numimgp,substr($rands,1,1));
$numimg3 = sprintf($numimgp,substr($rands,2,1));
$numimg4 = sprintf($numimgp,substr($rands,3,1));
$ys1 = rand(-4,4);
$ys2 = rand(-4,4);
$ys3 = rand(-4,4);
$ys4 = rand(-4,4);

$bgImg = imageCreateFromJPEG($bg);
$nmImg1 = imageCreateFromGIF($numimg1);
$nmImg2 = imageCreateFromGIF($numimg2);
$nmImg3 = imageCreateFromGIF($numimg3);
$nmImg4 = imageCreateFromGIF($numimg4);
imageCopyMerge($bgImg, $nmImg1, 10, $ys1, 0, 0, 20, 30, 50);
imageCopyMerge($bgImg, $nmImg2, 30, $ys2, 0, 0, 20, 30, 50);
imageCopyMerge($bgImg, $nmImg3, 50, $ys3, 0, 0, 20, 30, 50);
imageCopyMerge($bgImg, $nmImg4, 70, $ys4, 0, 0, 20, 30, 50);
header("Content-type: image/jpg");
ImageJPEG($bgImg,"",100);
imagedestroy($bgImg);
imagedestroy($nmImg1);
imagedestroy($nmImg2);
imagedestroy($nmImg3);
imagedestroy($nmImg4);
?>

enjoy!

Anyone wanting to create a reflecion of an image. Simple process that copies, line by line, from the bottom of the image, a given number of pixels. Each line gets gradually more transparent. Outputs PNG to screen.

This is pretty hot-coded - all four input variables (input image, reflection height, starting transparency, gap between image and reflection) are set manually here.

<?php
    $in = imagecreatefromjpeg('C:\test.jpg');
    $reflection_strength = 120;        //    starting transparency (0-127, 0 being opaque)
    $reflection_height = 40;        //     height of reflection in pixels
    $gap = 10;                        //    gap between image and reflection
    
    $orig_height = imagesy($in);                                //    store height of original image
    $orig_width = imagesx($in);                                    //    store height of original image
    $output_height = $orig_height + $reflection_height + $gap;    //    calculate height of output image
    
    // create new image to use for output. fill with transparency. ALPHA BLENDING MUST BE FALSE
    $out = imagecreatetruecolor($orig_width, $output_height);
    imagealphablending($out, false);
    $bg = imagecolortransparent($out, imagecolorallocatealpha($out, 255, 255, 255, 127));
    imagefill($out, 0, 0, $bg);
    imagefilledrectangle($out, 0, 0, imagesx($in), imagesy($in), $bg1);
    
    // copy original image onto new one, leaving space underneath for reflection and 'gap'
    imagecopyresampled ( $out , $in , 0, 0, 0, 0, imagesx($in), imagesy($in), imagesx($in), imagesy($in));

     // create new single-line image to act as buffer while applying transparency
    $reflection_section = imagecreatetruecolor(imagesx($in), 1);
    imagealphablending($reflection_section, false);
    $bg1 = imagecolortransparent($reflection_section, imagecolorallocatealpha($reflection_section, 255, 255, 255, 127));
    imagefill($reflection_section, 0, 0, $bg1);

    // 1. copy each line individually, starting at the 'bottom' of the image, working upwards. 
    // 2. set transparency to vary between reflection_strength and 127
    // 3. copy line back to mirrored position in original
    for ($y = 0; $y<$reflection_height;$y++)
    {    
        $t = ((127-$reflection_strength) + ($reflection_strength*($y/$reflection_height)));
        imagecopy($reflection_section, $out, 0, 0, 0, imagesy($in)  - $y, imagesx($in), 1);
        imagefilter($reflection_section, IMG_FILTER_COLORIZE, 0, 0, 0, $t);
        imagecopyresized($out, $reflection_section, $a, imagesy($in) + $y + $gap, 0, 0, imagesx($in) - (2*$a), 1, imagesx($in), 1);
    }
    
    // output image to view
    header('Content-type: image/png');
    imagesavealpha($out,true);
    imagepng($out);
?>

killing_wombles0000 gave an almost working piece of code to mirror an image with increasing transparency. With help from showdev on stackexchange, here's the corrected and fully working code:
<?php
$in = imagecreatefromjpeg('https://picsum.photos/id/1084/536/354?grayscale');
$reflection_strength = 120;        //    starting transparency (0-127, 0 being opaque)
$reflection_height = 40;        //     height of reflection in pixels
$gap = 0;                        //    gap between image and reflection

$orig_height = imagesy($in);                                //    store height of original image
$orig_width = imagesx($in);                                    //    store height of original image
$output_height = $orig_height + $reflection_height + $gap;    //    calculate height of output image

// create new image to use for output. fill with BLACK.
$out = imagecreatetruecolor($orig_width, $output_height);
//imagealphablending($out, false);
//$bg = imagecolortransparent($out, imagecolorallocatealpha($out, 255, 255, 255, 127));
$bg = imagecolorallocatealpha($out, 0,0,0,0);
imagefill($out, 0, 0, $bg);
imagefilledrectangle($out, 0, 0, imagesx($in), imagesy($in), $bg);

// copy original image onto new one, leaving space underneath for reflection and 'gap'
imagecopyresampled ( $out , $in , 0, 0, 0, 0, imagesx($in), imagesy($in), imagesx($in), imagesy($in));

 // create new single-line image to act as buffer while applying transparency
$reflection_section = imagecreatetruecolor(imagesx($in), 1);
imagealphablending($reflection_section, false);
$bg1 = imagecolortransparent($reflection_section, imagecolorallocatealpha($reflection_section, 255, 255, 255, 127));
imagefill($reflection_section, 0, 0, $bg1);

// 1. copy each line individually, starting at the 'bottom' of the image, working upwards.
// 2. set transparency to vary between reflection_strength and 127
// 3. copy line back to mirrored position in original
for ($y = 0; $y<$reflection_height;$y++)
{
    $t = ((127-$reflection_strength) + ($reflection_strength*($y/$reflection_height)));
    imagecopy($reflection_section, $out, 0, 0, 0, imagesy($in)  - $y, imagesx($in), 1);
    imagefilter($reflection_section, IMG_FILTER_COLORIZE, 0, 0, 0, $t);
    imagecopyresized($out, $reflection_section, 0, imagesy($in) + $y + $gap, 0, 0, imagesx($in) - 0, 1, imagesx($in), 1);
}

// output image to view
header('Content-type: image/png');
imagesavealpha($out,true);
imagepng($out);
?>

Hi
i wrote this script to add a watermark image into the bottom right a larger image. Its very basic i know but its all i need for now. It also is an easy function for noobs to grasp. It just takes an two image types as arguments

for example 
$image = imagecreatefromjpeg("FILELOCATION");
$insert = imagecreatefrompng("WATERMARKFILELOCATION");
$image = image_overlap($image, $insert);

function image_overlap($background, $foreground){
   $insertWidth = imagesx($foreground);
   $insertHeight = imagesy($foreground);

   $imageWidth = imagesx($background);
   $imageHeight = imagesy($background);

   $overlapX = $imageWidth-$insertWidth-5;
   $overlapY = $imageHeight-$insertHeight-5;
               imagecolortransparent($foreground,
imagecolorat($foreground,0,0));                imagecopymerge($background,$foreground,
$overlapX,$overlapY,0,0,$insertWidth,$insertHeight,100);   return $background;
    }

It doesnt smooth the edges between the two images but it works easily.