GIMP is also free and will handle tga and dds files, I found it a bit hard to learn though. You need the Nvidia dds plug in (free from Nvidia site) for both GIMP and Photoshop.
Photoshop Elements is a cheaper more basic version of PS and does a lot of the same things, that can handle tga and dds files with the plug in too.
Once you have your dds file you then need alpaca's converter to get .texture file the game uses.
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