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1. Create an animated gif (there are loads of shareware programs) and have say 5 frames with each one more tranpsparent thant the previous one.
2. Use Flash and have your image either fade with a motion tween to alpha or just have a white block on another layer which starts off in Alpaha and then tweens to opaque.
Create a new layer for your image. Open the alpha channel for that layer, and fill it with a gradient fading to transparent. Then create a new background layer in whatever color you'd like. The image should fade along with the alpha channel gradient, leaving the background color showing through.
Feather the selection the width you want the image to fade.
Inverse the selection and use the "back key" located above the enter key to blow the background out.
You can add a layer bellow, white or otherwise for a fill color.
Is it fade as in an animated presentation where black letters start to turn dark grey, then grey, then light grey, then white? Or is it fade, in the sense of a "color gradient" which transitions smoothly from one color into another?
"images that gradually fade
off into the background color"
I think that is pretty clear that he is refering to some kind of animation. Paint Shop Pro which I used to use all the time many moons ago has a built in animation package which can easily perform this kind of fade out.