Thanks for the replies.

DocJoe: Yes I've tried both 16 and 32 bit modes. I know I also played around with the ambient and albedo values (although I don't think I set them to 0).

Basically what it boils down to is that for me the overlay flag never really has worked (without combining and/or using other commands to get the same effect...I don't know.) I thought maybe it's a driver problem with my video card although that seems highly unlikely? Whatever the problem is it has been extremely frustrating and made things much more difficult for me in certain situations.