Hello!

The alpha channel is simply an additional grey-value channel, where you can store a mask with - most often - transparency information.
On the parts where it is black, the model or sprite will be fully transparent, where it is black it will be opaque. Grey values will be semitransparent.

In order to create an alpha channel you need a good paint programm (photoshop, paintshop, or the free Gimp). They all handle this procedure probably a little bit different.

In Paintshop Pro 9 for example it can be donne like this:

1) create a selection of the parts of the image, that should appear in the engine. You can use a border blur of 2 or three pixels, to soften the edges.

2) Go to >> Selection Menue >> Selection >> Selection load/save >> Save selection in alpha channel.

3) Now you have an alpha channel! Save your image in .tga format.

I translated the Paintshop commands from german, it might be somewhat different in english version ...