I have been working on solving this all morning before posting here. I have a simple plane that has a PNG image on it that I use to show character selection. The PNG has an alpha channel as shown in the following images:
However, in game, it has a shaded, semi-transparent look to it. The shader is set to Transparency and I have “Alpha is transparency” checked. I followed the Graphics HOWTO on how to set it up in Photoshop. Not sure what else to do.