Buy gosh, your exactly correct! I loaded it in a old Ulead VideoStudio ver. 7 I haven't used in quite awhile.
Low and behold I had a transparent AVI overlay!! Then tried in old Adobe Premier Elements ver. 3, and
again retained transparency! It's a shame a newer modern program by Sony lacks this, it also handled
importing PNG frames poorly. Ulead was bought out by Corel, which recently released VideoStudio Pro X3.
I couldn't find any info if it still supports 32-bit AVI. I hate to just assume. A list of video editors that do
would be helpful. I thought I read in these forums that FantaMorph 6 will allow video backgrounds within
the program. That would be GREAT!!
Sorry I previously thought the alpha problem was Fantamorphs fault, and thanks for the speedy reply
Keep up the fanta-tastic job.
UPDATE: Sony Vegas Movie Studio DOES support alpha channel AVI, just not by default! After importing
32-bit AVI rendered by FantaMorph and placing on Overlay Video Track in Sony VMS, you must then right
click the "clip" and select 'Properties', click the 'Media' tab, look down to 'Alpha Channel', and then select
from the drop-down menu (change from 'none' to 'straight {unmated}). Click 'OK', and now the background
will appear transparent, so now a background image/video can be placed on the main video track below
the overlay track. Sony really makes you have to jump thru hoops for this effect !

!
I figured I'd post this solution for anybody else who owns Sony Vegas Movie Studio.