I have a solution that has worked for me that keeps Grass Enabled, I've put this up on the Steam Forums after I found it worked and it works with this GOG version too. So some Copying and Pasting and a bit of Editing later ...
Visit this page: humus.name/index.php?page=Cool
• Download "GLOverride" (downloads as a ZIP file)
• Extract/Copy "opengl32.ini" and "opengl32.dll" into the Game's main executable folder (containing "swkotor.exe", in "C:\GOG Games\Star Wars - KotOR" by default)
• Edit the "opengl32.ini" and enable (change from 0 to 1) "ForceAlphaToCoverage"
• Alpha to Coverage requires Anti-aliasing to function so set the highest in game or in the "opengl32.ini" with "ForceMSAAMode" to the highest supported MSAA of your video card
• Enjoy proper Standing Grass Textures (after re-enabling Grass of course)
Comparison Pictues (From Steam version, but appears the same on GOG version)
Before GLOverride:
i.imgur.com/O4l6Gkp.png
After GLOverride:
i.imgur.com/iWFbdIs.png
There is one side effect, textures that have transparency will have dithering, it will make some thing look strange like causing a noticeable "flicker/shimmer" on highlighted options in the main menus but it's fairly minor in my opinion. [Edit: A higher Anti-aliasing setting helps.] And if anyone is curious, it seems to be related to the problem in this article I found while trying to fix this problem. computersciencelab.com/Direct3DTut1.htm
EDIT: Small decade later change of instructions to include Anti-aliasing requirement.
Post edited 6 hours ago by TruthUnknown