In Photoshop draw or scan in an image.
Select the part you want to be transparent.
Select - Inverse Selection
Select - Save Selection
Save As .... TIF
Put the image in your sourceimages folder
In the Hypershade, make a Lambert or Phong and attach a file texture to it.
(select the image with the alpha channel)
Select the particles
In the Hypershade, hold down the middle arrow on the shader (Phong or Lambert)
Select Assign Material to Selection
In the modeling window, hit 5, 6 to see the results
Creating a Smooth Alpha in Photoshop
Begin by erasing around the outside of your image using any method you
Drag your cut-out layer down to the new layer icon at the bottom of the
layer window (it is immediately to the left of the trash can) to duplicate your layer.
Hide the visibility of your original so it doesn't get in the way visually. (You do this by clicking the eyeball next to that layer)
Go to the Channels tab in your layers window. You should see 4 channels "RGB"and each individual color. Select one of those colors's indiviual channels (it doesn't matter which.)
Return to your Layers tab. Make sure the top layer is selected an press the "lock transparent pixels" button. (It is the left-most button above your layers) This makes it so you can not change the pixel's opacity.
Take a large black paintbrush and completely color your layer black. This colors only the current channel. (if you see any grays then that is where your alpha will be partially transparent giving it a smooth feel)
Go back to the Channels tab and right click on the channel you have been using and select "Duplicate Channel" and name it "Alpha".
Select the "RGB" channel, return to the Layer tab, delete the top layer, and unhide your original image.
Your file is now ready to save with an alpha channel.
-Tutorial by Tim Steele-