Photoshop Transparency Over Video

Hello.
I am using Final Cut Express 3.0.1 and Photoshop CS on OSX 10.4.3
I have a video clip and a Photoshop graphic I wish to place onto it. The graphic has a transparent area and I want the video to play in that area. The video contains a montage of still images, transitions, and video. Everything is rendered.
When I import the Photoshop file and place in on the timeline on top of the video sequence, only the still image parts of the sequence show up in the transparent area. When the video part begins, the photoshop transparency disappears altogether. How can I fix this?
Let me know if more information or a better explanation is needed.

Does the Photoshop file appear as a sequence icon in FCE?
The PSD file has transparency I take it. And you see the transparency when you put it on top of a piece of video in the timeline, but the transparency's gone when you start to play the sequence. Am I understanding that correctly?

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