Is there a way to make part of an object invisible? For example when object A is overlapped by object B (which may or may not be invisible) the overlapped part becomes invisible?
You can use the surface object to do this using custom alpha channels, or you could try using a shader.
Surface object works in flash.
Download and play around with the surface object, make sure you check out some of the examples.
They have one where they cut a hole in an object and such.