It took me about half a day to figure out what I was doing wrong when trying to create an alpha channel in Photoshop 5.5, so I wanted to post this so the info would be available to others that might try it.
This is NOT a tutorial. You can follow almost any Photoshop tutorial to find out how to select your object, create an alpha channel, and make sure it has the appropriate section colored white.
Saving as a TGA is where I ran into problems. With the correct channels selected, I found that "Save As" wouldn't give me the option of TGA, and while "Save a copy" DID give me the option, it didn't offer a dialogue to set the color depth (must be 32) and the image didn't have an alpha channel when uploaded.
Eventually, I found that the problem was the format I opened the image as. Some images import in a different color mode than others. When working with photoshop 5.5, before trying to save it, you need to go to the Image menu, choose mode, and then choose "RGB". Once you've done this, "Save As" and Save a copy" will both offer you a color depth dialogue on saving as a TGA, you can make sure you have 32 bit selected, and the alpha channel will work. (keep an eye on the alpha channel, photoshop seems to deselect it at random times)
Ingot