Clip Alpha doesn't seem to work in GLSL mode anymore, though it seems to work fine in MultiTexture and SingleTexture modes. It's odd. It used to be that using Clip Alpha with a partially transparent object would make it either invisible or visible, depending on how transparent you set the object. It doesn't work that way anymore, however. This makes Clip Alpha mode pretty much unusable, as the object's never transparent, so using an alpha-mapped texture has no effect, as the transparent portions are opaque.
I'm using Blender 2.63.2 r46135 32-bit on Windows 7 64-bit.
Attached is an example blend file - the left cube has Clip Alpha enabled on its material, but with a transparency of 0, is fully opaque. The right cube has a texture with an alpha-map, but the cube isn't transparent, so the texture has no effect on the cube's alpha value.
Description
Event Timeline
As an additional note, I've noticed that face textures seems to be somewhat implemented - if you don't have a material on a GLSL object, it will default to the UV-image assigned to the mesh, and do so with Alpha (?) enabled. Usually (possibly around 2.62 or so), objects without GLSL materials would simply be the default gray. This new behavior may be related to the problem.
As another additional note, it looks like it might be an issue with graphics cards - I have an AMD Radeon HD 7700 graphics card. Clip Alpha with 2.49's GLSL mode returns the same results for me, so it might be an issue with how the game engine handles clip alpha for certain graphics cards.
This indeed smells like a video driver issue -- works fine here on linux with gtx560ti, linux with intel card, windows with intel card and windows with gt520m cards.
Please check if fresh builds of blender works for you (could be found there http://builder.blender.org/download/). If the issue still present for you, please check for drivers update. It would also help if you'll check whether downloading opengl32.dll from http://download.blender.org/ftp/incoming/softwaregl/ makes cube transparent (it'll switch blender to fully software opengl which would eliminate possible hardware/driver issues).
Other thing to test is to run 64bit blender on 64bit platform -- there could be some video driver issues if you run 32bit blender on 64bit windows.
Testing the same files on different computer from your side would also help figuring out whether it depends on particular setup.
P.S. Game Engine doesn't do something specific for some certain graphics cards. Probably issue could be worked around somehow, but it'll be tricky without having access to buggy setup. Moving to OpenGL tracker.
I'm very sorry about never getting back to this - I forgot I opened this bug. It was indeed a video driver issue (for whatever reason ATI's drivers weren't working correctly with clip alpha). Updating the driver fixed the issue. Also, I didn't know there could be driver issues from using 32-bit Blender on 64-bit Windows. That's very useful to know.