Sounds like you figured it out.
Still here some screenshots to make it clear:

The alpha channel:
Black is transparent or invisable in the game. That is how holes are cut.

Here they are projected in red over the skin. (Photoshop so a bit different)

Here are the two damage layers visible. They contain the bullet holes and bigger damage.

Here are the damage textures again with the Alpha layer in red over the skin.
As you see the holes cut with the alpha layer fit within the textures that represent the edges of the bigger holes.
The damage textures and alpha layer should fit together likewise in your template.
Note that the damage textures are saved in two different TGA files. Maddox allready has these and that is why you need to keep the alpha layer untouched.