The 2nd-level Sor/Wiz spell alter self [trans] (Player's Handbook (2012) 197), in part, says
When the change occurs, your equipment, if any, either remains worn or held by the new form (if it is capable of wearing or holding the item), or melds into the new form and becomes nonfunctional. When you revert to your true form, any objects previously melded into the new form reappear in the same location on your body they previously occupied and are once again functional. Any new items you wore in the assumed form and can’t wear in your normal form fall off and land at your feet; any that you could wear in either form or carry in a body part common to both forms at the time of reversion are still held in the same way. Any part of the body or piece of equipment that is separated from the whole reverts to its true form.
The spell alter self makes no mention of changing the size of equipment like, for example, the spell enlarge person [trans] (PH 226–7) does. (This 2004 Rules of the Game Web column predates many of the revisions that would occur later to spells that change form; look upon its advice and rulings, as always, with a jaundiced eye.) Keep in mind, though, that usually magic items that are worn change size to match their wearer's size.
Mundane outfits like an entertainer's outfit (PH 129, 131) (3 gp; 4 lbs.)—like a backpack, winter blanket, and a day's worth of trail rations—have different weights (and, presumably, by extension, sizes) for Small creatures. This DM has always extended this to mean that such things must be purchased to scale. To compute prices and weights, this DM uses, if the item's worn, the rules for bigger and littler armor (PH 123) and, for other items, the rules for bigger and littler weapons (Rules Compendium 152).
Thus, this DM would rule that a gnome wearing a mundane Small entertainer's outfit that used the spell alter self to assume the form of a human would see that entertainer's outfit meld with his new form because his new Medium human form isn't capable of wearing a Small entertainer's outfit.
So, yes, like one of those nightmares, that gnome-now-human, had he not planned for this eventuality, would be on stage naked.
Keep in mind that the spell alter self et al. are exceptions. Normally, a spell of the subschool polymorph affects gear as follows:
Any gear worn or carried by the target melds into the new form and becomes nonfunctional. When the target reverts to its true form, any objects previously melded into the new form reappear in the same location on its body they previously occupied and are once again functional. Any new items worn in the assumed form fall off and land at the target's feet. (Player's Handbook (2012) 320)
Given this ruling's provenance—in, perhaps, among the last books that'll ever be officially published for 3.5e—, this is likely the final word on spells of the subschool polymorph.
