This isnt a tutorial on how to make bootskins or use your graphics proggie...I am assuming you already know this stuff...if not,there are other tutorials that cover these things.This is a tweaking tut for 16 color images...how to make them do what you want.
The reason XP bootskins look so terrible most of the time is (obviously) they are only 16 colors.Most bootskinners know that selecting the proper image (or editing one) to have fewer colors to reproduce will result in a smoother image.
The fun of bootskin for me is the challenge of taking a less than ideal image and making it translate to 16 colors as well as possible.
Bootskin Buddy is a great gadget by Rapidrobot that wont let you make a screwed up XP bootskin.
I picked this test image because I knew it would turn out pretty bad if I just let Photoshop 7 do it alone.(and cuz she is pretty hot) 
PS7 dosnt like exporting 4bit images unless the first color(0 index) in the index is BLACK...but dont worry about that,the GIMP is free and will fix the palette.It also has a drag and drop interface for the palette that will let you rearrange the color order without ruining the image.
That way you can make the 0 index whichever color of the 16 you like...that color determines the border and the progress bar background.(it dosnt HAVE to be black!)
So export your bitmap from PS any way you like...24bit is fine as long as you actually only used 16 colors.Use the GIMP to change its mode to indexed 16 color and it will save as 4bit.
The tip here is make your 16 color image any way you like...dont worry about force black and white...GIMP can fix your palette.If forced black and white looks best,do it...but dont feel you HAVE to just to get PS to export as 4bit.Forced black and white will make black index 0...but as I said,GIMP can rearrange that if needed.Even if you use forced black and white,you can still edit those colors to something more useful in the palette editor.
Now that you know that first index color can be any you want,you are a bit more free to choose more useful colors to get an image looking its best.
So let me show you some tricks for getting 16 color results that you might like better than what PS turns out by default.
Image 1 is my original...I suggest leaving it up next to your indexed images so you can compare and pick colors from if needed.
Image 2 is about the best PS7 could do after trying all the different combinations of perceptual,selective and adaptive with forced none or black and white...plus different percentages of dithering.Not too impressive...PS is averaging out the colors too much trying find a happy medium that results in a smooth picture.
Image 3 uses a technique called SELECTION weighting...just select the portion (or portions) of the image that have the colors you want to emphasize and PS will try to use mostly them to index the image...my example had just the lips selected but if you select say,the chair,the image colors will lean towards those shades.It can be handy for keeping a single color that isnt used much in the image from getting discarded...like someones eye color.
Image 4 is a twice indexed technique...index once with system mac,windows or web(up to 256 colors),then switch the image mode from indexed back to rgb(so the index option becomes available again),now index it again with only 16 colors(instead of EXACT)What this does is force PS to attempt to reproduce a broader range of colors with only 16(rather than going for just 16 to start and having many tones discarded)The reult is a more granular looking image but also much closer to the actual colors of the original.
Image 5 is my newest and most favorite trick.I had never used the forced CUSTOM option before in the indexing dialog.By choosing my own colors that I thought were important(directly from the original...thats why you need it up beside the one your working on),I got something that looks to me closer overall to the original.As long as you havnt closed your indexing dialog you cant refine your choices and PS will recalculate the dithering without goofing up the colors.(just click on forced custom again and change whichever colors you dont like or that you feel might be unneeded to something more useful...like an extra skin tone...look at your image and choose a color that might best be used to fix some of the worst dithered areas). 
Hope this helps...now go spend 2 hours on that bootskin...I do...heheheheh 
