From Dinorius_Redundicus (Trainz forums)
You asked how to do it in Photoshop. Very briefly this is how you add an alpha channel to a normal RGB colour image in TGA format;
- Open the tga image in Photoshop
- Look for a panel to the side of the screen with tabs for selecting 'Layers' and 'Channels'...click on the Channels tab.
- Notice the 4 coloured stripes in that panel. The one labelled RGB represents the overall image, and there are 3 others representing the component Red, Green and Blue channels. Clicking on any one of these stripes will display what that channel looks like.
- To add an alpha channel, mouse along the symbols at the bottom of the panel until you get a balloon message 'create a new channel'. Click that symbol (from memory I think it looks like a square with a smaller square inside it). A white stripe representing the alpha channel will be added under the red, green, blue stripes. Click on the white stripe to see what's in the alpha. At this stage it should be plain white. Click on the garbage bin symbol to delete the alpha channel.
To make certain areas of the colour image transparent using the alpha channel, first click on the RGB stripe to re-display the main image.
- Use one of the selection tools like the Lasso or Magic Wand etc to mark out the areas you want to be transparent. Holding down the Shift key while you do this will allow you to select areas that are in separate parts of the image. You should end up with all the required areas enclosed by dashed lines.
- Now click on the 'create new channel' symbol. It should again be plain white but this time, your dashed lines will be displayed on it.
- Use the 'paint bucket' tool set to pure black and click somewhere within the areas you marked out. They should become black. Pure black areas in the alpha will be completely transparent in the final image. If they are gray they will be partially transparent. White areas will be fully opaque.
Save the file, but make sure to choose '32-bit' since you need 32-bits to hold all the RGB plus alpha channel data. And since we are using the image in Trainz, make sure it is not saved as a compressed image (I think that's correct).