the way i did it was to open a .dds file and when it asked yes or no on the mipmaps say no. then when you when to save it, make sure to uncheak the Alpha Channel on the first area and name your file. then on the next area i use "DXT5 ARGB (Interpolated Alpha)" make sure the box right under its set to "2D texture" (you could use the volume setting as well but does nto always work) and then in make sure just to the right of thoughs boxes you select "Generate MIP maps" then you can just hit ok.
one thing though all pic's have to be squared and find it best to stay to a 64x64 type system like 128x128, 256x256, 512x512, or evern higher like 1024x1024. you get the point.
that should get you going took me a vary long time to get it right to start using the pic's so it had some see through area's that i wanted, and useing the .dds was the only way i could find and took long ot get it right