Transparency/Alpha channels

[AOE]

To create transparent backgrounds you need to properly configure the alpha channel. If you use Photoshop, it works like this:

In Photoshop, bring up the Channels box (Window, Channels). Normally, the RGB, Red, Green and Blue channels should be selected. If not, click the small box to the left of the RGB channel to bring up the eye. Then click the box of the Alpha 1 channel to bring up the eye there. Now select the Aplha 1 channel. Briefly, all eyes must be visible and the Aplha 1 selected.

When you select the Alpha 1 channel, the foreground and background colours turn to Black & White. Use drawing tools (pen, rectangle tool) and paint the areas you want to appear transparent. When you paint with the black colour, the area will appear reddish. These parts will appear transparent in the game. When you paint with the white colour or use the Eraser, you delete the reddish parts.

IMPORTANT: Keep copies of your files (e.g. in Photoshop format or the original backup), because when reloading .DDS files into PhotoShop, the transparent areas will be black and the original content lost.

this was taken from a tomb raider help page.