This is how I do it using PSP7
Open your base texture.
Make a copy. PSP calls this Image2 (assuming you don't have any other images open).
Working on Image2, select the area(s) that you want to be transparent, and fill them with solid black. Invert the selection (Shift+Crtl+I) and make everything else white. Deselect (Ctrl+D)
Go back to you base texture and select 'Mask' from the main menu.
Select New> From Image
Source window: Image2
Choose to create mask from 'any non-zero value' (in other words, anything that's not pure 0,0,0 white)
Click on 'OK' and you should see a part of your texture disappear, revealing grey and white checkers.
Congratulations - your texture now has a mask. However, it doesn't have an alpha layer yet. This is the bit that caught me out for several frustrating hours.
Go back to 'Mask' on the main menu. Now that your image actually has a mask, some of the previously greyed-out option have become available. Select 'Save To Alpha Channel', keep the default settings and hit 'OK'.
Your texture now has an alpha channel!
Save it as a .TGA file
Admittedly, this is a bit of a bare-bones tutorial, but I hope it helps.
Cheers
- Graham