Helpful reply xeppitz [/+1]
.there's a little more to it than that, that is assuming you're talking about UT .
UT, Black
MUST be #000000 / RGB 0 0 0 and once you've converted the image to 8-bit (Indexed colour as PS calls it), you should go to Menu > Image > Mode > Colour Table - and make sure the last entry in the table (bottom right) is black.
Unreal used to use pink and green for mask colours, but this is outdated and all UT models use black as the mask colour.
Save as BMP (not .pcx) and import to Ued with the "[X] Masked" box checked.
However..
If everyone is completely getting the wrong end of the stick and you're talking about 2k4, you'll first need to google for "Nvidia texture tools" , download and install the .dds plugin, and then , once installed, open the channels box, create a new channel ( Click the |+| down the bottom ) it should show as "Alpha 1"... paint/paste into this channel, remembering that white is full opacity, and black is full transparency - so any grey bits will be translucent, black totally invisible, and white compeltely solid.
Hope that helps.
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