Karen,
What application are you going to use to place the Photoshop image?
As RobGF said, the best way to knock out a white background from a bitmapped image is by using a clipping path.
However, support of clipping paths is pretty spotty from one application to the next. Page layout applications like QuarkXpress, PageMaker and Adobe InDesign support the feature. Depending on the application used you may have to use PhotoshopEPS or TIFF.
Surprisingly, I've never tried placing TIFFs or PSD EPS images into sign making applications like Flexi to see how they support clipping paths. Never know til you try.
Learning how to use the pen tool and its keyboard shortcuts will indeed allow you to hand digitize very accurate clipping paths. The "Make Work Path" command works only so well. Photoshop's pen tool keyboard shortcut work so well I often use it instead of other drawing programs to hand digitize things like scans of custom lettering or other drawings. It's just so much faster.
With some planning, you can combine the capabilities of Adobe Illustrator with Photoshop to develop perfect clipping paths for Photoshop-enhanced artwork made from paths brought in from Illustrator.
kalvix said:
Nope. Don't save the file as a .PNG. That file format only supports the RGB color model. You can't save .PNG images in CMYK mode. On top of that, you need an alpha channel mask for the .PNG method to work.
You can try saving a CMYK TIFF or Photoshop image with an extra alpha channel mask to knock out the background. But often that doesn't work very well. Most applications will output the image with raggedy edges rather than ones with smooth, anti-aliased edges.
Some newer applications may support a native layered Photoshop image. That may be the most simple solution. But you have to be sure the transparant areas on various layers in the document don't turn white when output. You'll probably just have to test it.
The newest versions of Photoshop can also saved layered images in TIFF format. But if you're going to import or place the file elsewhere be sure that application can support the feature as well.