I personal like to use .PNG images for all my sprites. They will retain their alpha channel data when loaded. So providing they have been set up correctly in Photoshop or some other program that will allow you to set specific "alpha areas" of an image, you shouldn’t have to do anything in terms of setting transparence once the image has been loaded.
Just to add a little extra to what HeavyAmp is saying -
The 'set image colorkey R,G,B' function will allow you to define which colour of an image you wish not to be rendered (Default=RGB(0,0,0)).
But like I said I personal would use either a .PNG .TGA or a .DDS file because they support 255 levels of transparency unlike the standard 1.