Alpha flag = geometry holes?

I'm probably doing something dumb but if I give my terrain the Alpha flag:
EntityFX terrain, 32

OR load my texture (DXT3 or png) with the alpha flag:
LoadTexture( "tiles.dds", 1+8+16+32 )

I get this where the terrain geometry is munted (sort of holes through things):


Any ideas? (I generate the terrain programmatically so may be something I've done.)