Yes, do this. But you could also try to save it as non-compressed .dds and try if overlay works. If you have the Photoshop-plugin for saving .dds you have to choose the 8:8:8 format (uncompressed, 24Bit, without alpha channel).
A6.31.4 Commercial
AMD Athlon XP 2400+
Radeon 9800Pro
512MB DDR-Ram
Windows XP Professional SP2
3D GameStudio Magazin