Mark is right about JPG-s. All full-color images (as well as 24bit PNG-s) suffer when using 8bit mode. To lessen the ugly effect windows usually can dither the colors, instead of displaying next closest available color it replaces it with mixed pattern of available colors.
I assume that application has to dither colors itself, windows only takes care of native widgets (desktop, window elements etc). There is good reason for browsers not doing color dither on run because it requires fair amount of cpu to do it constantly. AFAIK Netscape 3 had option to turn dither on/off and IE still has "smart dither" option. I'm not sure what that does, though.
You might want to check if there are some third party drivers available for your video card, in old days some cards used to have weird color depths available as well, like 15bit (although it needed proabably same amount of memory as 16bit
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