How come alpha is colorkey on images?

I mean. We're using 3D hardware under the hood right? But I can't get smooth bitmaps when my alpha channel is treated as a simple colorkey.

Is the the expected behavior?

Are you using the alpha flag of LoadTexture() ?

Or are you talking about 2D?

I'm talking about 2D :)
I'm probably going to convert it to 3D overlays instead to get it to work

I don't understand what you mean. What do you mean by "colorkey"?

Blitz uses DirectDraw for it's 2D operations which doesn't support alpha blending.

Ahh. I see. Say no more :)

You could use one of the many 2D-in-3D libs around:
http://homepage.ntlworld.com/config/imagepacker/
http://www.x-pressive.com/SpriteCandy
amongst others.