Trasparency

Use GIMP or Photoshop to create your texture in a format that supports transparency, i.e. .png

Add the texture to your material using UV mapping.

Then here is a checklist I use for blender to make the transparency work in the viewport, GE and render:

GLSL material
Materials: Render pipeline: ZTransp
Materials: Alpha = 0
Materials: Texture: UV and Flat
Materials: Texture: Map To: Col and Alpha
Texture: Image: Premul
Texture: Map Image: Use Alpha
Mesh Text Face: Use Alpha