Ah, fixed it.

Heres what I did, if anyone is intrested.

First step is to define a color to use as transparent. Direct Draw uses color keys. We can define a range of colors, but for this Im just using black (RGB(0,0,0))

Code:
Dim ddckBlack As DDCOLORKEY
With ddckBlack
    .low = 0
    .high = 0
End With
Now, since were changing the surface, we need to erase it to our transparent color.

Code:
sUnits.BltColorFill rScreen, 0
Note that rScreen is a RECT the size of the screen.

Finally, we set the surface to use the color key we want.
Code:
sUnits.SetColorKey DDCKEY_SRCBLT, ddckBlack
Now, when we blit, we need to tell the bltfast() command to use the source surface's color key. just use DDBLTFAST_SRCCOLORKEY