I've tried multiple file types, such as .psd, .tga (32bit), and .png, but I can't seem to get alpha transparency to work in my scene. I've saved it with an alpha channel and have also simply hidden the background layer in the .psd. Any suggestions? I'm using Mac OSX and Adobe CS5, if that changes anything at all. Thanks!!
Nevermind lol
I didn't try changing the shader type. In the dropdown, there's a transparency menu and then diffuse. That allows it to be transparent.