I did an earlier step-by-step tutorial for making clothes with Photoshop using the traditional Alpha Channel and TGA file.
Second Life began to support the newer PNG file last year. PNG files take less space to store. PNG files also do not require a separate Alpha Channel, so they are much easier to work with!
From what I understand, theres no different in quality between PNG and TGA files. So you might as well use PNG if you are new to making clothes in SL :)
The steps are a bit different between creating TGA and PNG files in Photoshop. So this is a similar step-by-step tutorial, written for creating PNG files in Photoshop. The screenshots were taking using Photoshop CS2. Since I only use basic Photoshop features, they should be similar to most versions of Photoshop.
Working with PNG in Photoshop

A PNG file gets the transparency information from various "Opacity" settings in the Photoshop "Layers" palette. So when you create a new texture (File/New...), be sure that you select "Transparent" option for "Background Contents:".
You can adjust the transparency of any part of a texture by setting the "Opacity" below 100%. You can change the Opacity of a Brush, or even an entire layer. You can even create Gradients that go from 100% Opacity to 0% Opacity. (Most Photoshop books will discuss how to adjust Opacity)
When your texture looks good, just select "Save As..." and "PNG". Thats it! You dont need to build a separate Alpha Channel :)
Overview

This is a tutorial on how to create a simple shirt in Photoshop (in PNG) using the SL Avatar UV template from Robin Wood. You can download the templates from here. For this tutorial, you should download the "layered Photoshop (.psd) Files". You only need the "Top (2.4 MB)" file. These are the same template files I use for making clothes in Second Life.
This tutorial will cover how to use the Template to make a shirt, and how to save the shirt as a PNG file for uploading to Second Life.
This tutorial is not intended as an in-depth Photoshop tutorial. There are many many books on Photoshop at the local bookstore, and classes and online tutorials. I do intend to show you step-by-step on how to use Photoshop to make a shirt in Second Life.
So lets get started!
Preparing the Template

From Photoshop top menu bar, select "File", then "Open...". Look for the "SL Avatar Top Layers.psd" file on your computer (make sure you are using the ".psd" file!). Click the "Open" button to open the Template file in Photoshop.

This will open the Template file in a window.
First, let's save a copy of the Template file so we dont accidently overwrite it (I accidently overwrite the template all the time! :P) Select "File" from the top of the window, and "Save as...".
Enter a Name for the new file (something like "Little Black Top") and click on the "Save" button.
OK, now we can play with the file without worrying about messing up the original. :)
By default, the Template file is 1024x1024 pixels. This is great for detail work where you want the highest resolution to align the edges (such as when you are making skins or textures that need to be closely aligned). However, we are just making a simple top for demonstration purposes.
Also, we will be producing a Targa format file (with transparency information). This file will be huge at 1024x1024 pixels. So let's reduce the size to a more manageable 512x512 pixel file.
Click on "Image" from the top menu bar. Select "Image Size...".

This will open the Image Size window. Enter "512" in both the Width and Height textboxes (Height might change automatically when you enter Width). Then click the "OK" button.
This reduces the resolution of the Template from 1024x1024 to 512x512 pixels.
Now we can start drawing.
First things first...I cant see anything :P Lets put a white background so we can at least see the Template.

Go to the Layers, Channels, Paths... palette. Click on the "Create a new layer" button.
(If you dont have the "Layers, Channels, Paths..." palette, click on "Window" on the top menu bar and make sure there is a checkmark next to "Layers".)

Right-click on "Layer 1" and select "Layer Properties...". This will open the Layer Properties window.
Enter "Backdrop" as the Layer Name (I dont want to call it "background" because that layer has a special meaning in Photoshop). Click on the "OK" button.

On the Layers, Channels, Paths... palette, click and hold on the "Backdrop" layer. Drag the layer to the bottom of the stack of layers (below "SubDivided UVs").

Click on the White square in the Color Swatches to select White as the foreground color.

Click on the "Paint Bucket" button on the Tools bar.
Make sure that the "Backdrop" layer is selected (highlighted in blue in the Layers, Channels, Paths palette). Using the Paint Bucket tool, click anywhere in the Template window to fill the Backdrop layer with white.

OK, thats better. Now we are ready to work :) You might want to save a copy of this file as a starting point for your future projects...
The wonderful thing about these graphics programs is the ability to create different layers for different things. Dont be shy about creating new layers! They are there to make things easier. As you can see, the Template came with a number of layers already. We just added a layer as the backdrop to make it easier to see the Template.
Creating the Shirt
We are going to create another layer to draw in our shirt.
On the Layers, Channels, Paths... palette, click on the "Backdrop" layer to select it. Click on the "Create a new layer" button on the bottom.
Right-click on "Layer 1" and select "Layer Properties...". This will open the Layer Properties window.
Enter "Shirt" as the Layer Name. Click on the "OK" button.

Your Layers, Channels, Paths palette should look like this when you are done.
Click on the Shirt layer to select it.
Make sure that the Shirt layer is below the SubDivided UVs layer, but above the Backdrop layer. If not, then click and hold on the Shirt layer, and drag it into place.

From the main Tools palette, select the Lasso tool. (If you dont see the Lasso tool in the palette, Right-click on the second square down from the top and select the Lasso tool.)

Draw a line all the way around the front side of the shirt (the figure on the left). Be sure you dont include any parts of the arm at the bottom.
Click on the Black square in the Color Swatches to select Black as the foreground color.
From main Tools palette, select the Paint Bucket tool.

With the Paint Bucket tool selected, click in the area you selected around the front side of the shirt. This will fill the selected area with black.

Now repeat the same process with the back side of the shirt (the figure on the right): select the Lasso tool, draw a line around the back side, selec the Paint Bucket tool, and fill the area with black.
Next, we are going to cut out an opening in the front and back sides for the neck. We are going to do this using the Pen/Path tool.

From main Tools palette, select the Pen tool (if you dont see the Pen tool, Right-click on the square [9th square down] and select the Pen).

There will be a new menu bar that appears at the top. On the left side, there are 3 options (Shape layers, Paths, and Fill pixels). Make sure that the middle button (Paths) is selected.

Using the Pen/Path tool, draw a path around the front side of the shirt (the figure on the left). It may help to zoom in on the neck area.
Simply click at each of these 5 points. Try to get the 3 points on the Green line. Remember to click on the first point again to close the Path.
Remember, you can always Undo your last action by pressing Ctrl-Z in Photoshop.

From main Tools palette, Right-click on the square with the Pen tool, and select "Convert Point Tool" at the bottom.

Click and hold on the Anchor Point in the middle of the neck. Drag a line towards the right. Move your mouse around until you have a nice-looking neck shape.

Right-click in the Template window (in the drawing window). Select "Make Selection..." from the popup menu. This will open the Make Selection window.
Select the "New Selection" radio button, and click "OK".
This turns the Path we just made into a selection.

Click on the "Edit" menu at the top of the window. Select "Clear".
This will cut a hole in the shirt for the neck :)

Now, do the same thing for the back side of the shirt:
Go to the main Tools palette, select the Pen tool (you need to change the Convert Point tool back to the Pen tool). Click on the 5 points around the neck. Click on the first point to close the Path.
Go to the main Tools palette, select the Convert Point Tool (change from Pen tool to Convert Point tool). Pull the middle Anchor Point to the right.
Right-click in the Template window (in the drawing window). Select "Make Selection..." from the popup menu. This will open the Make Selection window.
Select the "New Selection" radio button, and click "OK".
Click on the "Edit" menu at the top of the window. Select "Clear".

So here is our completed shirt.
You can create additional layers and draw in additional designs. You can do that now or come back later after you finish this tutorial. I would recommend you run through this tutorial first though...
Creating the PNG File
One last thing before we create the PNG file: we need to make the transparent areas...transparent :) In this case, we want everything in black to be opaque, and everything else to be transparent. By the way, white does NOT mean transparent! White is a color, just like black or any other color. We just happened to pick white to use as a working backdrop color.

Go to the "Layers, Channels, Paths..." palette. Click on the "eye" next to all the layers to hide them, leaving only the Shirt layer visible (use the scrollbars and make sure you check all the layers). When you are done, the Shirt layer should be the only one with an "eye" next to it.
Thats it :) We are ready to create the PNG file! (Isnt that much easier than messing with Alpha Channels ;P)
Click on the "File" menu at the top of the window. Select "Save" to save all of our changes.
Finally, lets export the file in PNG format...
Click on the "File" menu at the top of the window. Select "Save as..." to save all of our changes.

In the Save As window, select "PNG (*.PNG)" and click on the "Save" button.
You may want to change the file name and remove with word "copy" from the end of the name.

The PNG Options window will appear. Select and click on the "OK" button.
Thats it! The PNG file is now ready to be uploaded to Second Life.
The steps for uploading a texture file to Second Life and turning it into a shirt was covered in Creating Clothes Part 1 Tutorial. You can jump to the end of the tutorial, where it says "Next, go into Second Life..."
I just showed you the very basic steps in creating a clothing item in Photoshop and uploading it to Second Life. Now, feel free to go back and change the shape of the Shirt. Add some layers and create some designs. Or play with some of the other clothing templates (SL Avatar Bottom, Skirt, etc).
Have fun with your SL designer career :)
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