When you import the files, you are given the chance to set the Color Depth of the imported images. In order to use alpha-channel transparency, you should choose 32-bits. If the image has no alpha-channel information (in other words, if it was saved as a 24-bit image, or even less), then the Use Alpha option at the Bitmap panel of the Property Inspector will still be disabled.
For images with 1-bit transparency, you can use Background Transparent ink or Matte ink on the sprites. This will make all pixels either totally transparent or totally opaque.
Does this help you to display the images in Director the way you want them to appear?
What would be the best file type for 32 bit images as I have got the alpha channel working with if tiff image however the file size is 1.30mb which it too big.
Is there a smaller file type which would support this.
I also tried with a png of around 1mb but director somehow increased the size to 3mb
I like to use 32-bit PNG images. Director will report the size of the uncompressed image, not the size at which it is stored on disk. If you convert the movie to Shockwave format (.dcr and .cct), Director may apply JPEG compression to it, and so remove all transparency. For the best results, I like to link to external PNG files so that Director just saves the relative path to the files.
Does this help you make your choices?