Does anybody know how to make this work with the Ati Rage pro the caps say it can do it, but it has no effect. Thanks in advance BB

I have an ATI Rage Mobility, which is very similar to your card,
and the D3DTOP_MODULATE operation works just fine (DX7.0, UDv1 drivers by RageLT).
For example, I tried the following:

// select sources (texture and diffuse component)
m_pd3dDevice->SetTextureStageState( 0, D3DTSS_COLORARG1, D3DTA_TEXTURE );
m_pd3dDevice->SetTextureStageState( 0, D3DTSS_COLORARG2, D3DTA_DIFFUSE );

// select colour operation
m_pd3dDevice->SetTextureStageState( 0, D3DTSS_COLOROP, D3DTOP_MODULATE );

In my application, I manually light the vertices as follows:

Vertex.dcColor = ...

And I get correctly shaded triangles.
Hope this helps,
Paolo