Brush won't function in Overlay Layer in PS 7

Question

Yes, I'm using a very old version of Photoshop. No I cannot upgrade because I cannot afford it and I don't use it professionally. 
Anyway, I discovered to my great satisfaction recently how to create an Overlay Layer so that I could add color to an existing image without coloring over the lines and textures of the original image.  That original image was a PNG.
The new image I'm attempting use the Overlay feature on began as a TIFF from my scanner.
I saved it as a JPEG and then attempted to add an Overlay Layer.  I was successful, but for some reason the Brush will not activate when I click the left mouse button.  I tried saving the image as a PNG and a PDD, opening it again as those formats and then creating a new Overlay Layer, but still the same problem occurs.  For some reason, the Brush will only work on the original image Layer, not the Overlay Layer.  I followed the exact same steps in creating the Overlay Layers for both images, so I'm flummoxed as to the basic step that I'm missing!
Also, why do white backgrounds become tan when you open them in Photoshop?  Irfanview doesn't do that.  Just curious.
Thanks very much!
Dave S.

Answer 1

Try saving the file in Photoshop (.PSD) format while you are working it. In a Photoshop (.PSD) file you can save all your layers and work them whenever and then "save as" to convert them to jpg or tiffs or any of the others (that are not as dynamic) when you need to ship the thing off.
Did you save this new image as a greyscale? If so, you need to convert the document to rgb for it to understand color. Also set the document to be transparent. You can put a white layer underneath and you wont have to worry about the background "toning" to some legacy colorspace. MSTUNER has explained that process really well earlier in this string. (Kudo Kudo) You could also use the Levels cntrl+L and move the sliders towards each other to clean up your drawing and keep it sharp.
You can use more than one layer if you wish and set the entire layer to be in "Overlay" Blending Mode and change its transparency until your overlays reveal the desired effect.
Also once you start using the blend modes on the layers, you will find great control by changing the blend mode itself. In Photoshop 7 you can see it if you click on the box that says "normal" in the layers palette. A drop-down list appears with all of the blending modes listed. This is fabulous.
Darken, Lighten, Hue, Saturation, Color, and Luminosity are slick tools to refine color touchup.
There are other ways to do this in later versions of Photoshop, but Seven has the tools that you require.
Remember that you can use the brushes and painting tools in blending modes but you can also set the entire (overlaying) layer in any of the modes and use the brushes in "Normal" and then adjust the layer transparency at any time.
These are working tips. There are lots of ways to "skin the cat"