Okay, here's the deal on alpha transparancy. The cool thing about this is the fact that you can have partial transparency, as already noted. So, in addition to being able to define your graphic object piece (i.e. a 128x128 pix image inside your targa file), you can also set the transparency of the piece.
For example, in Photoshop 5.0, here's a picure of the channels tab.
In addition to the RGB channels, the alpha channel sets the transparency for the image file, which in this case is the window_pieces02.tga file.
Note the transparency for the spell bar window.
If you edit the alpha channel and just put black where the spell icon background should be, then an empty spell bar would be completely transparent.
Oh, and as a side note, the graphic for the spell icon that is in the foreground, the oval with a square cutout, is sort of special. In the interface, there is a color layer that is applied to it to give the spell icons their respective colors. So, for a red spell, spots that are white in the image will show up red and black spots will show up. The more white the pixel, the more red that shows up.Try it with a gradient sometime to see.
Hope I made some sense.