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Icons contain multiple formats and Windows load the closest bit depth - that is 8bb icon image in cas of 16bpp desktop. The 8bpp icons of course do not support alpha channel, so they are not as good. But htey can be optimized.
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I'd like to think that RealWorld Icon Editor has the most features when it comes to image->icon conversion. There are two areas where it is better than other apps: 1) it can apply effect (like drop shadow) during the conversion - and different ones on each generated format 2) it can optimize icon 4-bit and 8-bit formats for default windows background here is more about it: http://www.rw-designer.com/icon-png-image The 8-bit and 4-bit formats have their limitations and there is not much an application can do beside generating a good palette and dithering. The app can also assist you when preparing the images for conversion -> maximizing the used surface (Remove Empty Borders function) can make a difference for small icons.
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couple of icons screenshots from one of the later builds of Vista