bit late
When making a transparent material you will want to turn on Alpha Threshold to avoid sorting issues. This makes the transparent pixels be interperted as either 100% or 0% with no values in between. So for situations like this BC1 (aka DXT1 with the alpha included) works great because its transparency is stored as either black or white.
Hope this helps
MODO801/ MAX / HP Z820 Workstation, 2 X 8 Intel Xeon E5-2665 processor,64GB DDR3-1333, nvidia geforce gtx 660, rendergrd: 2 x Nvidia K1 (grid on HP proliant DL380G8)
