Yes, Display should be 1024 x 768 x 16. The way I use DrawAdd and drawAlpha is as follows:

Code:
dxImageList.Items[26].DrawAdd(DXDrawGame.Surface, Bounds(30, 660, 296, 43),
 0, Trunc(Cos256(FAngle)*126+127));
Code:
formGame.DXImageList.Items[formGame.fadingImageIndex].DrawAlpha(formGame.DXDrawGame.Surface,ImageRect,0,Alpha);
And do3d and doDirectX7 should be set to false.

Hope this helps